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Rating Action:

Moody's rates Dean Foods amended & extended bank facility at Ba3; raises liquidity rating to SGL-2; outlook stable

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 to SGL-3.

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 website.

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%.

New York
Linda Montag
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
John Diaz
MD - CCO Structured Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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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