Fitch: Dean Foods' Ratings Not Immediately Affected by Agreement to Sell
CHICAGO -- December 03, 2012
Dean Foods Company's (Dean's; NYSE: DF) credit ratings and Positive Rating
Watch will not be immediately impacted by the firm's announcement to sell its
Morningstar Foods division (Morningstar). A full list of ratings follows at
end of this release.
Pending Divestiture of Morningstar:
Dean Foods today announced that it has entered into a definitive agreement to
sell its Morningstar Foods division to Saputo Inc. for $1.45 billion.
Morningstar produces and sells dairy and extended shelf-life products
including coffee creamers, aerosol whipped toppings, and blended iced
beverages to retailers and foodservice providers in the United States.
For the latest-twelve-month (LTM) period ended Sept. 30, 2012, Morningstar
generated approximately $1.6 billion of sales and $154 million of EBITDA. The
purchase price is approximately 9.4x Morningstar's LTM EBITDA or about 8x
EBITDA after giving effect the tax structure of the transaction. The
divestiture, which has been approved by Dean's Board of Directors and is
subject to customary closing and regulatory conditions, is projected to close
by the end of 2012 or early in the first quarter of 2013.
Proceeds net of taxes and expense are expected to approximate $887 million.
Dean plans to use substantially all of the cash to help retire term loans
outstanding under its senior secured facility. Dean is forecasting net
debt-to-EBITDA, as defined by its credit agreements, of below 3.0x at the end
of 2012 if the transaction closes in the fourth quarter.
At Sept. 30, 2012, Dean had $3.5 billion of total debt of which $2.2 billion
was term loans. On Oct. 31, 2012, subsequent to the end of the third quarter
ended Sept. 30, 2012, Dean used a $1.2 billion distribution from The WhiteWave
Food Co. (NYSE: WWAV) to fund the repayment of term loans due April 2, 2014.
The distribution consisted of $282 million of net proceeds from the IPO of a
13% ownership stake in WWAV, which remains consolidated, and approximately
$885 million of borrowings under WWAV's secured credit facilities.
Recent Rating Actions and Rating Rationale:
Fitch upgraded Dean's ratings on Nov. 5, 2012 due to the firm's reduced
financial leverage, improved credit profile, and increased profitability at
its Fresh Dairy Direct (FDD) operations. For the LTM period ended Sept. 30,
2012, total debt-to-operating EBITDA was 3.8x, down from 5.0x at Dec. 31,
2011, and operating EBITDA-to-gross interest expense was 4.0x, up from 3.0x.
LTM FCF was $284 million, up from $124 million during calendar 2011.
Fitch also placed Dean's ratings on Watch Positive due to Fitch's view that
further deleveraging was possible following the spin-off and potential
divestiture of Morningstar. Fitch anticipates that Dean will generate
approximately $10 billion of annualized sales, $500 million of EBITDA and have
approximately $1.3 billion of debt following the spin-off of WWAV and
divestiture of Morningstar. Pro form total debt-to-operating EBITDA is
approximately 2.5x, which is modestly better than what Fitch had anticipated.
Dean's issuer default rating (IDR) could be upgraded to the 'BB' range
following the closing of the Morningstar transaction, due to the firm's
significantly reduced leverage. Future rating actions will reflect Fitch's
assessment of Dean's on-going capital structure, free cash flow, and business
risk as a less diversified traditional dairy business given volatile raw milk
costs and the continued decline in fluid milk volumes. Fitch currently
believes Dean can generate an excess of $100 million of FCF as interest
expense declines and capital expenditures are reduced to reflect the needs of
Dean's standalone FDD business.
The 'BB+/RR1' rating on Dean's secured debt reflects Fitch's view that
recovery prospects for these obligations would be outstanding at 91% - 100% if
the firm filed for bankruptcy. The debt is secured by a perfected interest in
substantially all of Dean's assets. The 'BB-/RR3' unsecured rating is due to
Fitch's opinion that bondholder recovery would be good at 51% - 70% in a
Liquidity, Maturities, and Financial Covenants:
At Sept. 30, 2012, Dean had over $1.4 billion of liquidity consisting of $69.8
million of cash, $1.0 billion of secured revolver availability, and $337
million available under its receivables-backed facility. Dean's $1.275 billion
revolver expires April 2, 2014 and its $600 million on-balance sheet
receivables-backed facility matures on Sept. 25, 2013. Dean voluntarily
reduced the size of its revolver to $1 billion on Oct. 31, 2012.
Scheduled maturities of long-term debt at Sept. 30, 2012 were $51.7 million in
2012, $206.6 million in 2013, and $1.2 billion of mainly term loan debt in
2014. As previously mentioned, Dean repaid all of its 2014 term loans on Oct.
31. 2012 and its resulting 2013 maturities have also declined to $10.5
Financial maintenance covenants in Dean's credit facility currently include
maximum total and senior secured leverage ratios. The calculation excludes up
to $100 million of unrestricted cash and adjusts for charges and non-recurring
items therefore bank leverage ratios are modestly lower than those calculated
The total leverage covenant is currently 5.5x, stepping down to 5.25x on March
31, 2013 and 4.5x on Sept. 30, 2013. The senior secured leverage restriction
of 3.75x, steps down to 3.5x on March 31, 2013. Dean is also bound by a
minimum interest coverage requirement of 2.75x which steps up to 3.0x on March
31, 2013. Dean reported total leverage and senior secured leverage, as
calculated by its credit agreement, of 3.71x and 2.58x, respectively at Sept.
30, 2012, which indicates EBITDA cushion in excess of 25%.
What Could Trigger A Rating Action
Future developments that may, individually or collectively, lead to a positive
rating action include:
--Total debt-to-operating EBITDA in the mid-3.0x range or lower in most years
and continued good FCF generation;
--Continued structural improvement in Dean's FDD business and a rational
wholesale pricing environment are also critical factors surrounding future
Future developments that may, individually or collectively, lead to a negative
rating action include:
--A sustained period of materially higher than expected leverage; such that
total debt-to-operating EBITDA consistently exceeds 4.5x, could trigger a
downgrade in Dean's existing ratings;
--Negative FCF generation, additional step downs in FDD's profitability due to
lower gross profit and/or wholesale pricing concessions could influence future
downgrades in ratings.
Fitch's rates Dean Foods as follows:
Dean Foods Company (Parent)
--Issuer Default Rating (IDR) 'B+';
--Secured bank credit facility 'BB+/RR1';
--Senior unsecured debt 'BB-/RR3'.
Dean Holding Company (Operating Subsidiary)
--Senior unsecured debt 'BB-/RR3'.
The above ratings have been placed on Rating Watch Positive.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Aug. 14, 2012);
--'Fitch Upgrades Dean's IDR to 'B+'; Places on Rating Watch Positive' (Nov.
--'High-Yield Food, Beverage, Restaurant, and Consumer Products Handbook'
(Sept. 19, 2012);
--'Dean's Outlook Remains Positive on Proposed IPO/Spin-Off of WhiteWave'
(Aug. 8, 2012);
--'Fitch Upgrades Dean's Credit Facility and Unsecured Debt Ratings; Revises
Outlook to Positive' (May 15, 2012);
--'U.S. Leverage Finance Spotlight - Dean Foods Company' (April 20, 2012).
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Carla Norfleet Taylor, CFA, +1 312-368-3195
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie, II CPA, +1 312-368-3186
Mark A. Oline, +1 312-368-2073
Brian Bertsch, +1 212-908-0549 (New York)
Press spacebar to pause and continue. Press esc to stop.