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Fitch Downgrades Labeyrie Fine Foods to 'B-'
May 5, 2017 / 5:07 PM / 5 months ago

Fitch Downgrades Labeyrie Fine Foods to 'B-'

(The following statement was released by the rating agency) LONDON/MILAN, May 05 (Fitch) Fitch Ratings has downgraded French packaged food group Labeyrie Fine Foods SAS's (LFF) Long-Term Issuer Default Rating (IDR) to 'B-' from 'B' following news of an ongoing refinancing process of the company's debt and increase in its leverage profile. The proceeds will be used to repay shareholder loans and refinance LFF's EUR355 million senior secured notes due 2021 and currently rated 'B+'/'RR3'. We therefore expect to withdraw the instrument ratings on refinancing completion. The downgrade by one notch reflects Fitch's belief that LFF's refinancing process will lead to higher total leverage and slower de-leveraging profile. Despite a good operational profile, LFF's rating headroom has been tight under its 'B' IDR as a result of comparatively weak liquidity position and net free cash flow generation, driven by largely debt-funded acquisitions made in the financial year ended June 2016 (FY16). KEY RATING DRIVERS Planned Changes to Capital Structure: According to newswire sources, LFF has completed the syndication of a new bank debt facility of EUR455 million, which will be used to repay its EUR355 million senior secured notes and fund the repayment of up to EUR100 million shareholder loans. Completion of this refinancing will add EUR100 million to LFF's balance sheet. Leverage Increase: The addition of EUR100 million derails the de-leveraging trajectory that we had previously seen as achievable for LFF. Compared to the assumptions that underpinned our February 2017 rating affirmations, whereby LFF's funds from operations (FFO) adjusted net leverage had scope to fall to 4.7x by FY19, we now project net leverage of approximately 6.5x in FY18 and 5.7x in FY19. LFF's FY16 debt-funded acquisitions resulted in FFO adjusted net leverage increasing to 5.5x in FY16. Ongoing Operational Challenges: LLF maintains a strong business model but its operations are currently challenged by another avian flu outbreak and the generation of close to 30% of EBITDA in the UK with imported products that may suffer from GBP volatility and trade restrictions in the context of Brexit. LLF proved to be able to manage the effect of avian flu despite its recurrence and to mitigate the transactional and translational negative effect from the depreciation of the pound by passing a large part of the cost increases on to its retail customers in UK. Diversification Strategy: LFF's acquisition strategy and its record of innovation help reduce its business risk profile through diversification by product range, raw materials and geography, and lower sales seasonality. The companies acquired in FY16, including Pere Olive, King Cuisine and Aqualande, clearly help mitigate the supply and raw materials difficulties of the French premium and UK businesses. They are also less seasonal and benefit from higher margins. Pere Olive and King Cuisine reinforce growth prospects and enhance geographical diversification, due to their location and as they provide export opportunities, notably to Germany and Scandinavia. Resilient Profitability: Fitch expects the EBITDA margin to slightly decrease by 10bp to 7.9.7% in FY17 due to the combination of the second avian flu outbreak, the depreciation of sterling and record-high salmon prices. However, Fitch expects a recovery to above 8% in FY19. This should be driven by the group's ability to offset, albeit with delays, lower production volumes and higher raw material prices through selling price increases and the positive impact of the integration of the FY16 acquisitions, which provide better organic growth prospects and have less volatile margin profiles. We also expect greater resilience in profitability to arise from medium-term cost synergies resulting from management's focus on better integrating the group's various businesses. M&A Absorbs Free Cash Flow: Fitch expects LFF's free cash flow (FCF) generation to remain positive, despite some volatility in operating margins over the next three years. Fitch however expect the company to continue its strategy of diversification by acquisitions and the approximately EUR 15 to 20m per annum FCF to be utilized for bolt on M&A. DERIVATION SUMMARY LFF has narrower margins than most food manufacturing peers due to the high share of raw materials in its cost structure. Moreover, it benefits from low raw-material and geographical diversification, although this is improving. The volatility in performance is mitigated by the company's high market shares (allowing strong bargaining power with client retailers), high brand reputation and the price inelasticity of demand, especially in its premium segments. In addition, compared to other food manufacturers sharing the same operating margin profile and size, Labeyrie benefits from a stronger financial structure and financial flexibility. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for LFF include: - annual sales growth in mid-single digits; - in FY17 and FY18, the full contribution of the FY16 acquisitions should be significantly offset by the second avian flu outbreak and the depreciation of the pound; - thereafter, Fitch assumes stable organic growth of around 3% per annum; - EBITDA margin down to 7.9% in FY17 and FY18, with the impact of avian flu and the Brexit vote being mitigated by the full-year integration of higher-margin Pere Olive, King Cuisine and Aqualande; - working-capital needs development in line with sales and raw materials (both prices and volumes); - capex stable at 2.8% of sales; - completion of the planned refinancing with an extra EUR100 million of debt raised and used to return a total of EUR100 million to shareholders over FY18 and FY19 and a new EUR65m RCF; - no acquisitions in FY17, internally generated cash-funded acquisition spending of EUR15-20 million per annum from FY18. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: - EBITDA margin maintaining a recovery trajectory towards 8% together with higher cash-flow generation and strong liquidity - Adjusted FFO net leverage maintaining a trajectory of consistent decline below 5.5x Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - EBITDA margin below 6% on a sustained basis - Neutral to negative FCF margin for two consecutive years - FFO adjusted leverage consistently above 7x, due to either aggressive financial policy or sustained operating underperformance LIQUIDITY Adequate Liquidity: At FYE16 LFF's readily available cash on balance sheet was low at EUR2 million (Fitch-adjusted), but liquidity was supported both by its undrawn EUR45 million revolving credit facility (RCF) maturing in 2020 and by its EUR80 million factoring facility maturing in 2017, which we expect will be renewed. Fitch expects liquidity to remain adequate after FY16, supported by positive FCF generation, the forecast renewal of its factoring facility and an increase to EUR65m of the RCF included in the refinancing package. Furthermore, post refinancing the group faces only minor scheduled debt repayments before 2023. Contact: Principal Analyst Marialuisa Macchia Associate Director +39 02 8790 87213 Supervisory Analyst Anne Porte Director +33 1 44 29 91 36 Fitch France SAS 60, rue de Monceau 75008 Paris Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 Summary of Financial Statement Adjustments Readily Available Cash: As of 30 June 2016, Fitch estimated EUR22 million of the group's reported cash and cash equivalents deemed as not readily available for debt service. This is the amount Fitch considers as needed to fund LFF's intra-year working-capital needs and as such, it captures sales seasonality. For its calculation, Fitch has considered working-capital needs excluding the positive impact of the receivables sold under the factoring line. Subordinated Debt: Fitch assigned 100% equity credit to the EUR15.9 million subordinated debt outstanding at FYE16. FFO: Fitch has excluded fees related to acquisitions and refinancing costs (together amounting to EUR4.6 million) from its FY16 FFO calculation. Media Relations: Stefano Bravi, Milan, Tel: +39 02 879 087 281, Email: stefano.bravi@fitchratings.com; Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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