Fitch Rates Flowers' $300MM Term Loan 'BBB'
NEW YORK -- April 12, 2013
Fitch Ratings rates Flowers Foods, Inc.'s (Flowers; NYSE: FLO) new five-year
senior unsecured term loan 'BBB' with commitment levels of up to $300 million.
Pricing will be approximately LIBOR + 187.5 basis points. The proceeds will be
used to help finance the pending acquisition of certain assets from Hostess
Brands, Inc. (Hostess). The $300 million is within Fitch's expectation, and
pro-forma leverage, as discussed below, is anticipated to remain in the low 3x
The term loan provides Flowers with ample flexibility. The company can make a
single draw of as much as $300 million essentially through Sept. 30, 2013 to
coordinate with the Hostess closing. The debt/EBITDA leverage covenant steps
down from 3.75x to 3.5x four quarters after closing. However, Fitch expects
Flowers' leverage to be below 3x 12 months after closing leaving ample cushion
in this covenant. It is also anticipated that there will be a significant
cushion as well in the interest coverage covenant at a maximum of 4.5x.
The term loan amortizes fairly rapidly after the first year with 10% in the
second and third year and in the 30% range annually thereafter. The
amortization schedule and EBITDA growth with the acquisition should support
Flowers' goal of de-leveraging to pre-Hostess levels within two years of
Additional items of note are that certain baskets were increased in
recognition of the company's larger size. For example, significant
acquisitions for which the company would need to provide pro forma covenant
compliance statements were increased to $400 million from $325 million.
Further, if Flowers' rating drops below investment grade, wholly owned
domestic subsidiaries must provide an upstream guarantee. These terms exist in
the current $500 million revolving credit agreement and term loan. However,
with its April 10, 2013 8-K filing, the larger baskets in the new term loan
were harmonized with the existing agreements via contemporaneous amendments.
The credit agreements provide more protection for the bankers than for
investors in the $400 million public note, as expected. However, there is good
protection provided for the noteholders via the bank agreements. Subsidiary
debt is set at a maximum of $200 million, providing a limit to structural
subordination. Prior to the amendments, the limit was $150 million. The
financial covenants, which do not exist in the notes, also impart good credit
Key Rating Drivers:
Flowers' ratings reflect its leading position as the second largest producer
of baked goods in the U.S., with over $3 billion in 2012 revenues, successful
geographic expansion over the past several years, and a stable business model.
Flowers is a low-cost operator in a highly mature industry. The company has
generated low single-digit organic revenue growth rates, even though industry
volumes have been slightly negative, because of its ability to price for these
daily consumed staples. Flowers has steadily increased its market share over
Fitch notes that as expected, Flowers' credit protection measures remain good
but are not at historically strong levels. The company had been under-levered
and had a significant cushion in its rating category through 2010. Total
adjusted debt/EBITDAR was under 2.4x with funds from operations (FFO) interest
coverage well in excess of 28x from 2004 through 2010. The cushion in the
rating was expected to provide the company with flexibility to participate as
a leader in a consolidating industry and also in recognition of limited
geographic diversification. Through 2010, the company primarily competed in
the southern U.S.
The company is focused on growth and has made or announced several
acquisitions over the past two years in order to expand its geographic
footprint. The change removed a qualitative constraint on upward rating
movements. However, leverage is likely to continue to increase above
historical levels through 2013. Fitch anticipates that credit protection
measures will be weak for the current rating category in the near term.
Flowers is committed to using internally generated cash flow to reduce debt
within 18 to 24 months after it closes on the Hostess asset purchase this
year. Fitch expects that the company will not execute any sizeable
acquisitions until debt/EBITDA is comfortably under 2x (roughly 3.25x on a
total adjusted debt/EBITDAR basis). The company's solid liquidity and
commitment to de-levering post the Hostess acquisition, discussed below,
underpins the rating and the Stable Outlook.
In 2011, Flowers announced its goal to accelerate its geographic footprint to
reach 75% of the U.S. population by 2016. Half of the growth would be
accomplished via acquisitions and it was anticipated that leverage would
increase as a result. Within the past 18 months, Flowers purchased Tasty
Baking Company in May 2011 for $172 million, Lepage Bakeries, Inc. (Lepage) in
July 2012 for $382 million and the Sara Lee bread, buns and roll brand in
California in February 2013 for $50 million. By the end of this year the
company will have accomplished its goal to access 75% of the U.S. population
and significantly expanded its geographic footprint three years early.
However, as a result, debt increased by almost $500 million in 2010, from $127
million to $607 million at the end of 2012. Debt/EBITDAR leverage followed a
similar trajectory to 3x.
In January 2013, Flowers announced it would purchase five bread brands
including Wonder, Merita and Butternut, along with 20 bakeries and other
assets for $360 million from Hostess. After filing for Chapter 11 in January
2012, Hostess unexpectedly exited the market in November 2012 and its assets
became available for sale. Pending regulatory approval, Flowers expects to
close on the Hostess asset purchase in the second half of 2013. The purchase
is likely to be largely debt financed, since Flowers typically carries very
little cash on its balance sheet. As a result, Fitch expects the company's
leverage to increase moderately in 2013. Debt could grow to $1 billion if the
entire $360 million purchase price is financed.
Fitch has determined after a review of Hostess' court filing that Hostess'
gross margins were in line with Flowers' and that over its past three fiscal
years there appeared to be no major deterioration of its brands, as reflected
in a relatively stable revenue line. Furthermore, in buying assets, Flowers is
not exposed to Hostess' legacy liabilities, which include substantial pension
obligations. Although unexpected, Fitch believes this acquisition is
strategically important and beneficial to Flowers' operations immediately and
in the long term as it cements its geographic expansion.
Flowers began recording double-digit volume growth after Hostess shut down.
Further, at its analyst presentation on March 20, 2013 the company announced
that revenues were up 20% to 25% and that gross margins had improved through
mid-March 2013. Importantly, Flowers is adding meaningful volumes to its fixed
cost base and its capacity utilization has improved as have margins since
fourth quarter 2012 (4Q'12). Volume growth is being driven by the company's
organic expansion, Hostess-related gains, and incremental revenues from the
mid-2012 Lepage acquisition. Lepage and the Sara Lee brand acquisition in
California should add 7 points of revenue growth in 2013, while recently
enacted pricing to offset commodity input cost should add 4 to 6 points. Given
this, there is support for Flowers to see revenues increase in the 20% range
Pro forma leverage (total adjusted debt/EBITDAR) if the Hostess transaction
was financed entirely with debt would be in the low 3x range. The calculation
is based on a 20% increase in revenues ($3.7 billion) against a stable
historical 13.4% EBITDAR margin. As such, leverage would not be substantially
more than the 3x seen at year end. However, as mentioned previously it is weak
versus historical levels and for the rating category.
Liquidity and Debt:
Much of the company's immediate liquidity is derived from internally generated
cash flow and access to its $500 million revolver which matures in November
2017. There was $373 million in revolver availability at year end. Flowers
generated positive free cash flow (FCF) in eight of the past 10 years.
However, Flowers' FCF is variable given the impact of hedging on cash flows.
The company recorded $63 million in FCF in 2012, which was a material but
anticipated improvement from the negative $24 million recorded in 2011. Given
volume growth and margin improvement year to date, Fitch expects meaningful
improvements in FCF in 2013. Again, volatile commodity costs - primarily wheat
costs - could change Fitch's expectations for FCF in either the negative or
Long-term debt maturities are very modest over the next four years. Assuming
that the Hostess acquisition closes by the end of the third quarter and the
full $300 million term loan is drawn, there would be less than $50 million in
long-term debt maturities annually from 2014 through 2016. For 2013, there is
less than $70 million in long-term debt maturities, including the remaining
$66 million of the existing term loan. These are manageable obligations for
An upgrade beyond 'BBB' is not anticipated in the near term.
Future developments that may, individually or collectively, lead to a negative
rating action include:
A downgrade could occur if deleveraging is slower than Fitch expects with
total adjusted debt/EBITDAR remaining over the mid-3x range over the next 18
to 24 months. A downgrade could also occur with another sizeable acquisition,
which is not expected, or the negative cash impact of commodity cost spikes,
although those have been short in duration.
Fitch currently rates Flowers as follows:
--Issuer Default Rating (IDR) 'BBB';
--$500 million Revolving Credit Facility 'BBB';
--$400 million Senior Unsecured Note 'BBB';
--$68 million Term Loan A 'BBB'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research
'Corporate Rating Methodology', Aug. 8, 2012;
'Fitch: No Immediate Rating Impact from Flowers Foods' Bid for Certain Hostess
Assets', Jan. 14, 2013;
'Fitch Affirms Flowers' IDR at 'BBB'; Outlook Stable', Mar. 28,2013.
Applicable Criteria and Related Research
Corporate Rating Methodology
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Grace Barnett, +1 212-908-0718
Fitch Ratings, Inc.
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New York, NY 10004
Judi Rossetti, CFA, CPA, +1 312-368-3186
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