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09 Jul 2010
New York, July 09, 2010 -- Moody's today rated Dean Food's amended and extended senior secured
bank credit facilities at Ba3 and raised the speculative grade liquidity
rating for Dean Foods to SGL-2 from SGL-3. The company's
corporate family rating (CFR) remains Ba3 with a stable outlook.
The SGL rating upgrade reflects the signing of an amend and extend to
the credit facility which will give the company more room under its Leverage
Ratio covenant, pushes out and flattens the debt maturity schedule
and lowers near term amortization. These moves were necessary following
a very weak first quarter which saw a 61% drop in cash flow from
continuing operations (from $185 million in 2009 to $71
million in 2010) and an increase in leverage to 4.43 times at the
end of Q1 (as defined by credit agreements) as compared with 4.16
times at the end of the year. Moody's believes that there would
have been little or no cushion under the bank leverage covenant under
the credit facilities by year end 2010 absent this amendment given a scheduled
covenant step down. While liquidity has improved for the medium
term as a result of this transaction, the new covenant cushion remains
modest, and Moody's is concerned about the margin pressure
the company is experiencing and its impact on cash profitability.
We will be closely observing quarterly results and could take negative
action in the future should the pricing environment remain unchanged and
if cash flows deteriorate further.
Using Moody's financial metrics, it is our expectation that the
company will end the year with leverage somewhat over 5 times compared
with 4.9 times at the end of 2009. While this is within
the acceptable range for the Ba3 rating, it is in contrast to an
expectation of some leverage improvement during the year.
The company is facing pressures on its profit margins in fluid milk due
to retailers using private label milk products to drive retail traffic
by selling it at little to no profit margin, widening the pricing
gap at retail between Dean's branded product and store brand milk.
This is causing a mix shift from Dean's more profitable branded business
to a heavier demand for private label milk for which it earns substantially
lower margins. Moreover, retailers are demanding price concessions
from suppliers like Dean for their private label supply, further
squeezing the private label margins. "To the extent that the current
retailer behavior becomes a more sustained shift in favor of private label
milk sold at break-even prices, eroding the profit algorithm
for Dean more permanently, downward pressure on Dean's ratings would
ensue," said Linda Montag, Moody's SVP.
Dean's Ba3 rating and stable outlook are based on the company's national
market share and scale in the US Dairy industry, the potential for
further cost efficiencies/ productivity improvements as management focuses
on internal integration and streamlining of operations, and its
strong distribution network with comprehensive refrigerated direct store
delivery systems. These positives are offset by very narrow margins
inherent in its largest, commodity-oriented milk business,
more limited product/geographic/ customer diversification than certain
other large global food and agriculture firms, and the potential
for both volatility in milk prices as well as shifts in the pricing strategies
of retailers to erode profitability. While the company can generally
pass on increases in the underlying price of raw milk monthly, the
volatility of all of its inputs has swung much more widely in recent years
than in past history and the company has faced a profit reducing mix shift
away from branded and into private label milk. The difficult pricing
environment is somewhat out of the company's control and cost cutting
efforts may not be enough to compensate for the significant erosion in
selling margins. It is not clear if and for how long the competitive
pricing strategies at retail will remain in place and whether the shift
to less profitable private label business will be permanent. There
is also still a lot of progress to be made in the areas of cost cutting
and integration. Margins, having improved during 2009,
slipped again to the low single digit range in the in the first quarter.
The following facilities were rated as part of the amend and extend transaction
(extended portions only):
Senior Secured Revolver: $1.275 billion extended to
April, 2 1014 at Ba3; LGD3, 42%
Senior Secured Term Loan A: $1.102 billion extended
to April 2, 2014 at Ba3; LGD 3, 42%
Senior Secured Term Loan B, 2016 Tranche: $492 million
extended to April 2, 2016 at Ba3; LGD 3, 42%
Senior Secured Term Loan B, 2017 Tranche: $561 million
extended to April 2, 2017 at Ba3; LGD 3, 42%
The following rating was upgraded
Speculative Grade Liquidity Rating to SGL2 from SGL3
The last rating action was on May 13th 2010 when we lowered the SGL rating
The principal methodology used in rating Dean Foods was Moody's Global
Packaged Goods Methodology, published in July 2009 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Dean Foods, based in Dallas, TX, is the largest processor
and distributor of milk and various other dairy products in the United
States, and the largest producer of soy milk in Europe through its
Alpro division, with consolidated net sales of approximately $
$11.2 billion in 2009, of which dairy operations accounted
for around 76%.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
MD - CCO Structured Finance
Corporate Finance Group
Moody's Investors Service
Moody's rates Dean Foods amended & extended bank facility at Ba3; raises liquidity rating to SGL-2; outlook stable
No Related Data.
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