Standard & Poor's lowers Premier Foods' long-term credit rating to B from B+, says company faces operating challenges, execution risks in conjunction with its new covenanted disposal program

Nevin Barich

NEW YORK , April 12, 2012 (press release) – Overview
-- In our view, U.K.-based Packaged Foods Producer Premier Foods faces operating challenges and execution risks in conjunction with its new covenanted disposal program.
-- We have therefore lowered our long-term credit rating on Premier Foods to 'B' from 'B+' and removed it from CreditWatch.
-- The company must meet specific disposal milestones by year-end 2013, as required in its new bank-refinancing package.
-- The negative outlook reflects the risk of a further downgrade within the next year if the company cannot make progress in achieving these milestones and deleverage to revised covenant levels.

Rating Action
On April 11, 2012, Standard & Poor's Ratings Services lowered its long-term issuer credit rating on U.K.-headquartered packaged food producer Premier Foods PLC (Premier Foods) to 'B' from 'B+', and removed the rating from CreditWatch, where it was originally placed with negative implications on Oct. 18, 2011. The outlook is negative.

Rationale
The downgrade and negative outlook reflect our view that, despite the successful completion of its bank refinancing, Premier Foods is exposed to execution risk in conjunction with the disposal program.

Under the terms of its revised bank agreement, Premier Foods must generate disposal proceeds of GBP330 million by June 30, 2014, and meet certain progress milestones from Dec. 31, 2013. In our opinion, notwithstanding a stabilizing outlook for the U.K. food processing industry, the timing, scale, and achievable multiple for disposals depends on market conditions, and credit market volatility may constrain demand among potential buyers for these assets.

The rating reflects our view of Premier Foods' "highly leveraged" financial risk profile as our criteria define this term. This is because we anticipate that Standard & Poor's fully adjusted debt to EBITDA will be substantially above 5x for the 12 months to Dec. 31, 2012. Nevertheless, our base-case operating scenario for 2012, which does not factor in any disposals, includes interest coverage in excess of 2x, and positive free operating cash flow. This is based on our assumption of a stabilizing EBITDA margin of 11.5%-12% on a fully adjusted basis. This view is supported by our assumption of moderate price increases and slower raw material price inflation. Premier Foods reported some easing in input inflation toward the end of 2011, in line with industry peers.

We continue to view the business risk profile as "fair" under our criteria, based on the company's exposure to volatile, commodity-based raw material prices, reduced pricing power in negotiations with retail clients, and an underinvested brand portfolio. Balancing this, the company benefits from a diverse brand portfolio and well-established market positions in some
segments, such as bakery. The company also benefits from critical mass in the U.K. food processing industry, from which it generates ongoing EBITDA in excess of GBP200 million.

Liquidity
We assess Premier Foods' liquidity profile as "less than adequate" under our criteria.

Premier Foods' liquidity profile reflects covenant risk over an 18-month timeframe, in terms of executing covenanted disposals and deleveraging by year-end 2013. We believe that the requirement to deleverage to below 4.52x by Dec. 31, 2013, requires significant asset disposals or improved profitability, both of which may prove difficult to achieve.

In our opinion, other than the covenant risk, the company's current liquidity sources sufficiently cover its short-term working-capital and capital-spending requirements over the next 18 months, with no scheduled amortization or pension-deficit funding prior to 2014.

Our estimate of the company's current liquidity sources includes:
-- GBP45.8 million of cash on balance sheet (on Dec. 31, 2011);
-- GBP224 million available under the revolving credit facility (on Dec. 31, 2011), with an extended maturity date of June 30, 2016; and
-- Our anticipation of future annual funds from operations in excess of GBP70 million (before pension-deficit contributions).

We anticipate the following uses of liquidity over the next 12 months:
-- Moderate working-capital requirements of less than 10% of ongoing EBITDA; and
-- Annual capital spending of GBP55 million-GBP60 million, which is capped by the bank covenant and is marginally lower than the GBP68 million incurred in 2010, and GBP79 million in 2011.

Outlook
The negative outlook reflects the risk of a downgrade within the next year if Premier Foods does not sufficiently deliver on its disposal program to ensure continued financial covenant compliance.

We could lower the rating if unexpected adverse operating developments caused the company's cash interest cover to fall below 2x. This could result from an extraordinary spike in raw material costs without a corresponding increase in prices.

We could revise the outlook to stable if we felt that Premier Foods were able to lower its debt and maintain consistently adequate covenant headroom, as well as cash interest cover in excess of 2x, which we consider commensurate with the 'B' rating.

Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable Consumer Products Industry, April 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008

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