London, England-based Fitch Ratings Limited has assigned an issuer default rating (IDR) of “CCC” for Findus Group senior payment in kind (PIK) notes amounting to €200 million at 8.25%/9%, and a final debt rating of “CC/RR6.” The final ratings are in line with the expected ratings posted on July 23, 2014.
The Findus Group, headquartered in the United Kingdom, is regarded as one of Europe’s leaders in the retail frozen food manufacturing and distribution sectors. Ranked as the No. 1 branded player in Sweden, Norway, Finland and France, its product lines run the gamut from vegetables and side dishes to fish, seafood, ready meals and soups.
Owned by private equity interests, the company employs more than 6,o00 people. From Young’s Seafood brand Homestyle Breaded Cod Fillets and Jumbo Whole Shrimp in the UK, to Findus Finest French Green Beans, Sausage & Mash and Crispy Pancakes, it produced 350,000 tons of products at manufacturing plants in five countries last year. Revenues were reported at approximately €1.4 billion.
According to a press release issued by Fitch on December 8, the financial ratings firm has not included the issue of €200 million notes in its leverage ratios due to their equity-like characteristics – mainly the issuer’s option to pay either PIK or cash interest. Fitch expects the interest on the new notes to be paid in kind, given Findus’ current limited financial flexibility. Citing the neutral impact of the planned notes on the company’s cash flow and senior debt, the credit metrics of the restricted group remain unchanged.
The issuer default rating of “CCC” is derived from Findus’s “B-” IDR reflecting its links to the operating performance of the restricted group, but notched down to reflect higher default risk. The higher default risk is largely attributable to the holding company’s subordinated nature within the holding structure and significant limitations (e.g. restricted payments) to upstream payments from the restricted group.
The press release from Fitch stated, in part: “The instrument rating on the PIK notes of CC reflects the deeply subordinated nature of these instruments relative to Findus’s senior liabilities as well as the absence of direct claims over the restricted group other than a residual equity claim on Findus. Fitch believes that under a distressed scenario, this feature is likely to result in weak Recovery Ratings of RR6 in the range of 0%-10%.”
Key Rating Drivers
While Findus remains the retail frozen food brand leader in key segments of the Scandinavian and French markets, Fitch anticipates increasing private label penetration and competition from chilled food products to continue putting pressure on the group’s profit margins. Cost savings, while limited, are expected to remain crucial for profit growth.
Commodity Price Volatility
Sudden commodity price inflation, such as the recent all-time high cost of salmon, in conjunction with greater volatility in food commodity markets will continue to challenge Findus, according to Fitch, especially in the event of a slowdown in consumer spending. Meanwhile, the group is benefiting from continued investments in product innovation and successful negotiations of contracts with food retailers to pass on price increases in raw materials.
Scope for EBITDA Stability
Fitch expects product innovation and contract negotiations to mitigate raw material price increases. As such it projects that EBITDA margins should remain fairly stable at FY14’s (year to September 2014) 8% level. FY13 and 3QFY14 performances were in line with management’s expectations despite challenges in frozen fish sales in Norway. EBITDA margins returned to the FY11 level, having previously been on a contracting path.
Resilient Food Consumption
Consumption of fast-moving consumer goods is fairly resilient through the economic cycle, although growth in mature and developed markets is limited. Findus’ product innovation capabilities and targeted marketing spending are key to ensuring its offerings remain relevant to consumers amid changing economic conditions, consumer preferences, health concerns and food price inflation.
Improving FCF
Findus has historically generated low levels of free cash flow (FCF), which Fitch considers a weakness. Although it anticipates a mildly negative FCF margin in 2014 due to one-off costs for refinancing, exchange rate translational differences and working capital unwinding, cash generation is expected to improve, albeit remaining relatively weak at around 1% during FY14-FY16.
High Leverage
Findus’ funds from operations (FFO) adjusted gross leverage at the end of FYE13 post refinancing remained high at 6.4x. Fitch expects leverage to improve towards 5.5x with FFO fixed charge cover moving towards 1.8x by 2016. If maintained, this leverage profile would be considered relatively strong for the assigned “B-” rating, relative to close rated peers.
Rating Sensitivities
Future developments that could, individually or collectively, lead to positive rating actions include:
- Improvement in operating profitability and organic business growth evidenced by EBITDA margin improvement up to 9% (FYE13: 7.9%) and FCF margin of 3% or higher (FYE13: 0.2%).
- Further de-leveraging with FFO adjusted leverage to or below 5.5x on a sustained basis (FYE13: 6.4x).
- FFO fixed charge cover at 2x or above on a sustained basis (FYE13: 2.3x).
On the other hand, future developments that could lead to negative rating actions include:
- A contraction in organic revenue, for example resulting from increased competitive pressures, combined with a steady reduction in operating profitability leading to an EBITDA margin below 7%.
- Consecutive periods of negative FCF leading to erosion of the liquidity cushion.
- A sustained deterioration in FFO adjusted leverage to or above 7x.
- FFO fixed charge cover sustainably at 1.5x or below.
Liquidity and Debt Structure
Fitch anticipates that Findus’ liquidity will remain adequate, supported by a super senior revolving credit facility (RCF) of £60 million and, in the longer term, mildly positive FCF generation from FY15.
The company’s current debt includes approximately £400 million of senior secured notes maturing in July 2018, and RCF of £60 million maturing in December 2017. While there is no debt amortization pressure in the foreseeable future, Fitch believes that the deleveraging path will be slow and dependent on growth in EBITDA. It expects FFO adjusted leverage to remain above 5.5x until at least 2016.
