Overview
-- Greece-based dairy manufacturer Fage Dairy Industry S.A. has changedits domicile to Luxembourg (AAA/Negative/A-1+) and renamed itself FAGEInternational S.A. (Fage).
-- At the same time, revenues and EBITDA coming from Greece continue todecline as Fage's U.S. operations are rapidly growing.
-- We are affirming our 'B' long-term corporate credit rating on Fage.
-- The negative outlook reflects our view that we could still lower therating on Fage if Greece leaves the eurozone, which we believe could result insevere and prolonged disruptions of Fage's activities in Greece, where about50% of its assets are located.
Rating ActionOn Oct. 9, 2012, Standard & Poor's Ratings Services affirmed its 'B' long-termissue and corporate credit rating on Luxembourg-incorporated FAGEInternational S.A. (Fage; previously Greece-incorporated Fage Dairy IndustryS.A.). The outlook is negative.
We have removed all ratings from CreditWatch where we had originally placedthem on June 8, 2012.
Rationale
The affirmation reflects our view that Fage's new corporate structure and itsgrowing U.S. business has reduced the group's exposure to Greece--Fage nowgenerates more than two-thirds of its revenues outside Greece. Nonetheless, westill believe there are risks to the company's business should Greece leavethe eurozone, and we continue to estimate there is at least a one in threechance of a Greek exit. We understand that about 50% of Fage's revenues aregenerated by assets located in Greece, and thus believe a Greek exit couldstill lead to severe and prolonged disruptions of Fage's Greek operations,which could require significant working capital.
We view Fage's recently announced corporate restructuring, which primarilyconsists of a change of domicile from Greece (CCC/Negative/C) to Luxembourg(AAA/Negative/A-1+), as positive from a credit standpoint. We now believe thatthe risks linked to being a Greek incorporated company--including potentialreduced access to capital markets, and legal uncertainties--have beenaddressed. At the same time, we believe that Fage will continue to grow itsU.S. operations, which should more than offset the persistent deterioration ofits Greek activities. Therefore we project that Fage will further reduce itsexposure to Greece, where the company currently generates about 30% of itssales. On this basis, we project that Fage should be able to maintain leveragebelow 5x and an adequate liquidity position despite potential furtherdeterioration in its Greek operations, thanks to our anticipation of acontinuous strong dynamism of its U.S. Greek yogurt activities.
However, Fage still has about 50% of its assets located in Greece, serving theGreek, the Italian, and the U.K. markets. We believe a Greek exit from theeurozone could lead to meaningful disruptions, principally related to theproduction and distribution of Fage's products in these markets. Although weunderstand that Fage has already reduced its exposure to the weakest localdistributors in Greece, we believe that there is a risk of productioninterruptions and of significant payment delays in Greece, which could requiresignificant working capital. We believe that Fage could withstand temporarydisturbance thanks to its adequate liquidity position (namely EUR33 million ofcash on balance sheet, and a committed $50 million revolving credit facility(RCF) mostly undrawn at the end of June 2012; and the absence of any materialdebt maturities before 2015). However, we believe that Fage may encounterdifficulties withstanding potential severe and prolonged disruptions thatcould result from a disorderly exit of Greece from the eurozone, since Fage'sfast-growing U.S. activities also require investments in working capital andin capacity expansion.
Liquidity
Fage's liquidity is "adequate," according to our criteria. We estimate thatthe company's sources of cash will exceed uses by more than 1.2x over the next12 months.
We anticipate the following sources of liquidity as of June 30, 2012:
-- Cash balances of EUR33 million, primarily located in the U.S. and inLuxembourg;
-- Forecast annual funds from operations of about EUR35 million; and
-- A $50 million RCF expiring in 2016.
We anticipate the following uses of liquidity as of the same date:
-- Short-term borrowings of EUR28 million;
-- Annual capital expenditures of around EUR15 million in 2012; and
-- Moderately negative working capital outflows of about EUR10 million, dueto some potential payment delay in Greece and revenue growth in the U.S.
Fage's next significant debt maturities are not until January 2015 (EUR101.5million) and February 2020 ($150 million), which further supports the"adequate" liquidity position.
We note that the only financial covenant on Fage's RCF is a springing 1.1xfixed-charge coverage ratio. It would only be triggered if the RCF'savailability dropped below the greater of 15% of its maximum availability and$5 million. This covenant is not currently in effect because the RCF hasavailability in excess of this minimum.
Outlook
The negative outlook reflects our view that we could lower the rating on Fageif Greece leaves the eurozone, which could result in severe and prolongeddisruptions of Fage's activities in Greece, where about 50% of its assets arelocated. Under such a scenario, we believe working capital requirements couldrise meaningfully, leading to higher short-term borrowings, which could leadto Fage's liquidity moving outside the adequate territory, and/or to debtleverage increasing to above 5x.
We could revise the outlook on Fage to stable if we believed that the risk ofGreece leaving the eurozone had declined or if Fage continued to meaningfullylower its exposure to Greece, which could take the form of a different mix ofasset locations.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,2012
-- Methodology And Assumptions: Liquidity Descriptors For GlobalCorporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings ListCreditWatch/Outlook ActionTo FromFage Dairy Industry S.A.Corporate Credit Rating B/Negative/-- B/Watch Neg/--Senior Unsecured B B/Watch NegFage USA Dairy Industry Inc.Senior Unsecured B B/Watch Neg
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)
((e-mail: pam.niimi@thomsonreuters.com; Reuters Messaging:pam.niimi.reuters.com@reuters.net; Tel:1-646-223-6330;))