-- AdvancePierre Foods is refinancing its existing debt and paying a special dividend to its shareholders.
-- The company has modified its previously proposed structure for its recapitalization transaction and modestly increased the total dollar amount of new debt financing.
-- We are assigning ratings to AdvancePierre's newly proposed second-lien term loan and withdrawing our ratings on its previously proposed senior unsecured notes.
Rating Action On Oct. 1, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate credit rating on Cincinnati, Ohio-based AdvancePierre Foods Inc. The rating outlook is stable.
In addition, we affirmed our recently assigned issue level rating of 'B' on AdvancePierre's proposed new 4.75-year first-lien term loan, which has been upsized to $925 million from $825 million. The recovery rating remains '3', which indicates our expectation for meaningful (50%-70%) recovery for lenders in the event of a payment default. We also assigned our 'CCC+' issue level rating to AdvancePierre's proposed new $375 million five-year second-lien term loan. The recovery rating is '6', which indicates our expectation of negligible (0%-10%) recovery for lenders in the event of a payment default. At the same time, we withdrew our ratings on AdvancePierre's previously proposed $450 million five-year senior unsecured notes. The company's new $150 million asset-based revolving credit facility (ABL) is unrated.
AdvancePierre intends to refinance its existing credit facilities as part of a recapitalization that includes the payment of a special dividend to shareholders. We had previously anticipated that debt levels will increase following this recapitalization, and this upsizing of the first-lien term loan will result in a further nominal increase in debt of about $25 million. However, AdvancePierre's financial maintenance covenants will be eliminated in this proposed recapitalization, resulting in the company's liquidity position being restored to "adequate." (The company's new ABL will have a springing fixed charge covenant.) Our ratings on AdvancePierre's existing first-lien term loan will be withdrawn following the completion of this transaction. Our new issue ratings are subject to review upon receipt of final documentation.
AdvancePierre had about $1.12 billion of total debt outstanding as of June 30, 2012, and is expected to have about $1.35 billion following the revised recapitalization transaction.
The ratings on U.S.-based AdvancePierre Foods Inc. reflect Standard & Poor's view that the company's business risk profile is "weak" and its financial risk profile is "highly leveraged." Key credit factors in our assessment of AdvancePierre's business risk profile include the company's narrow product focus, participation in the highly competitive packaged foods industry, exposure to volatile commodity costs, and significant exposure to the cyclical foodservice channel.
AdvancePierre Foods has a narrow product focus as a manufacturer of differentiated value-added protein and handheld convenience food items that it sells primarily to foodservice distributors, schools, national accounts, retailers, and convenience stores. It develops, manufactures, and markets processed food items, including meat products and ready-to-serve nonmeat products. A significant portion of the company's sales are in the relatively low margin and cyclical foodservice channel, with product offerings primarily in the value-added protein segment of the highly competitive packaged food industry. The company is exposed to volatile commodity costs, including proteins, and we believe the industry may face margin pressure in the near term, given the increases in protein prices we expect. AdvancePierre also has limited international diversity: We estimate more than 90% of its sales are in the U.S. and the balance is primarily in Canada.
For the first half of 2012, sales were up about 3% and adjusted EBITDA was up more than 10% relative to the prior-year period (pro forma to include the Barber Foods acquisition). Although AdvancePierre's operating performance improved somewhat in the first half of 2012 as a result of higher prices, favorable advance protein purchases, and lower operating expenses, we believe operating performance will experience some pressure through the remainder of 2012 because of continuing high commodity costs. The majority of the company's pricing is now based on pricing lists or pass-through commodity pricing, and some fixed contract business, which may mitigate but does not eliminate the effect of rapid input cost movements. We expect the company will continue to address these anticipated higher input costs with pricing actions and cost savings. In addition, favorable forward purchases of protein should mitigate some of the rising input costs. However, given recent drought conditions and feed cost increases, we believe protein costs may continue to rise and AdvancePierre's ability to pass along cost increases could affect its profitability over the near to intermediate term. (AdvancePierre is a private company and does not publish financial statements.)
Our assessment of AdvancePierre's "highly leveraged" financial risk profile reflects the company's significant debt obligations and very aggressive financial policy. We estimate its ratio of adjusted total debt to EBITDA was about 6x, excluding projected synergies, for the 12 months ended June 30, 2012, reflecting the first full year of operating results since its merger with Barber Foods in May 2011, and is in our indicative ratio range of greater than 5x for a highly leveraged financial risk profile. We estimate the ratio of adjusted funds from operations (FFO) to total debt was about 6.5% for the 12 months ended June 30, 2012, and remains within the indicative ratio range of below 12% for a highly leveraged financial risk profile.
The proposed debt refinancing and funding of the dividend will add over $225 million of incremental debt and result in a delay in AdvancePierre's progress in gradually improving credit metrics; they will instead weaken in the near term, with estimated total debt to EBITDA of over 7x and FFO to total debt of less than 5.5% for the 12 months ended June 30, 2012, as compared with 6.0x and 6.5%, respectively, prior to this transaction. While we believe AdvancePierre will apply its discretionary cash flows to debt reduction during the remainder of 2012 (which should result in a gradual improvement in the credit metrics), we believe total debt to EBITDA will remain near 6x at year-end. In addition, we believe the debt-financed dividend to AdvancePierre's shareholders is reflective of the company's very aggressive financial policies.
We believe credit protection measures will remain highly leveraged over the next year, based on our forecast and the following key assumptions:
-- Mid-single-digit revenue growth primarily because of pricing.
-- Low-teens EBITDA margin reflecting continued high commodity costs and some reduction in operating expenses.
-- Refinancing $1.12 billion of existing debt.
-- A $182 million dividend paid to shareholders of AdvancePierre.
-- Dividend, debt refinancing, and associated transactions costs/fees funded with a $50 million draw on the new $150 million ABL revolving credit, $925 million new first-lien term loan, and $375 million new second-lien term loan.
-- No significant acquisitions.
-- Free cash flow is utilized to reduce debt
We believe AdvancePierre's liquidity is "adequate." Our assessment of AdvancePierre's liquidity profile incorporates the following factors:
-- We believe cash flow sources will cover uses in excess of 1.2x for the next 12 months.
-- We expect liquidity sources will continue to exceed uses, even if EBITDA were to decline by 15% from current levels.
-- We assume maintenance financial covenants are eliminated as part of the refinancing of the senior secured credit facilities.
-- The company has moderate debt maturities over the near term.
-- We believe the company has sound relationships with its banks.
As of June 30, 2012, the company had about $61 million outstanding on its existing $100 million asset-based revolving credit facility (unrated). The upsizing in the proposed new ABL revolver to $150 million will provide additional liquidity. Management projects sufficient availability on the facility throughout the year for working capital needs. There is some seasonality in the business related to the company's supply to schools, with peak working capital borrowings in July and August. We believe AdvancePierre will generate sufficient cash flow from operations to fund its capital expenditures and required annual amortization (about $9.3 million annually) on the proposed new first-lien term loan.
Recovery analysis The issue-level rating on AdvancePierre's new $925 million first-lien term loan is 'B', the same as the corporate credit rating. The '3' recovery rating indicates our expectation for meaningful (50%-70%) recovery for lenders in the event of a payment default. The issue-level rating on the company's new $375 million second-lien term loan is 'CCC+'. The recovery rating is '6', which indicates our expectation of negligible (0%-10%) recovery for lenders in the event of a payment default. (For the complete recovery analysis, please see our recovery report to be published on RatingsDirect following the release of this report.)
The stable outlook reflects our anticipation that the company will maintain adequate liquidity and that leverage will be reduced below 6x. We could consider a downgrade if the company's financial policies become more aggressive, if leverage does not decline as expected, if operating performance deteriorates substantially, or if liquidity becomes constrained. We estimate this could occur in a scenario of flat sales growth and gross margin (excluding depreciation and amortization) declining by 200 basis points or more, which could occur as a result of continued high commodity costs and lower-than-expected sales volumes, and or the payment of an additional debt-financed dividend. We could consider an upgrade if AdvancePierre's operating cash flow increases and it achieves and sustains strengthened credit measures, including a reduction in leverage to less than 4.5x and an increase in the ratio of funds from operations to total debt to a range of 12% to 20%, ratios that are within indicative ranges for an aggressive financial risk profile. We estimate this could occur in a scenario of upper single-digit percentage sales growth and improved operating performance from realized price increases and cost savings.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Our Rating Process, April 15, 2008
Ratings List Ratings Affirmed AdvancePierre Foods Inc. Corporate Credit Rating B/Stable/-- Senior Secured
$925 mil. fltg rate 1st-lien term
loan B due 2017 B Recovery Rating 3 New Rating AdvancePierre Foods Inc. Senior Secured
$375 mil. fltg rate 2nd-lien term
loan due 2017 CCC+ Recovery Rating 6 Not Rated Action To From AdvancePierre Foods Inc. Senior Unsecured $450 mil. notes due 2017 N.R. CCC+ Recovery Rating N.R. 6
Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at
. All ratings affected by this rating action can be found on Standard & Poor's public Web site at . Use the Ratings search box located in the left column. (New York Ratings Team)