Fitch Upgrades Dean's IDR to 'BB-'; Outlook Stable
CHICAGO -- April 30, 2013
Fitch Ratings has taken various rating actions on Dean Foods Co. (Dean; NYSE:
DF) and Dean Holding Co.
The following ratings have been upgraded:
Dean Foods Company (Parent)
--Issuer Default Rating (IDR) to 'BB-' from 'B+'.
Dean Holding Company (Operating Subsidiary)
--IDR to 'BB-' from 'B+'.
The following ratings have been affirmed:
Dean Foods Company (Parent)
--Secured bank credit facility at 'BB+';
--7.0% senior unsecured notes due June 1, 2016 at 'BB-';
--9.75% senior unsecured notes due Dec. 15, 2018 at 'BB-'.
Dean Holding Company (Operating Subsidiary)
--6.9% senior unsecured notes due Oct. 15, 2017 at 'BB-'.
Fitch has simultaneously withdrawn its Recovery Ratings given reduced
probability of default at the 'BB' IDR level.
Dean's ratings have been removed from Rating Watch Positive where they were
placed on Nov. 5, 2012. A Stable Rating Outlook has been assigned.
At Dec. 31, 2012, Dean had $3.1 billion of total debt. Approximately $2.3
billion was at the Dean Foods Co. and Dean Holding Co. level while $781
million was at the firm's publicly traded majority-owned subsidiary - The
WhiteWave Food Co. (WWAV).
Key Rating Drivers:
The upgrade is due to Dean's considerably lower debt balance following the
divestiture of its Morningstar operations and the subsequent application of
proceeds to repay term loans. Furthermore, Fitch believes that total
debt-to-operating EBITDA, post the spin-off of WWAV, can be maintained below
3.0x in most years.
Ratings incorporate Dean's intention to spin off the majority of its 86.7%
economic interest in WWAV by late May and to retain up to 19.9% or 34.4
million of WWAV shares. Dean plans to monetize or distribute the remaining
ownership to its shareholders in a tax-free manner at a later date. Fitch is
not anticipating further debt reduction beyond amounts discussed below but
believes the maintenance of WWAV shares add to Dean's financial flexibility.
On Jan. 3, 2013, Dean completed the sale of Morningstar for $1.45 billion of
pre-tax proceeds or an estimated $887 million of proceeds net of taxes and
expenses. The purchase price was approximately 9.4x Morningstar's LTM EBITDA
or about 8x EBITDA after giving effect to the tax structure of the
transaction. Due to the staged timing of associated tax payments, the firm
used the majority of the pre-tax cash to fully retire all of its secured term
loans. Dean repaid $480 million of 2016 tranche B term loans, $547 million of
2017 tranche B term loans, and $265 million of revolver balances outstanding
at Dec. 31, 2012.
Over the past year, Dean has used proceeds from the IPO of WWAV, asset sales,
and internally generated cash flow to repay more than $2 billion of debt. Post
the use of Morningstar divestiture proceeds to pay off term loans, Dean's
total debt approximates $1.8 billion. Dean has $1 billion of long-term bonds
and $781 million of debt related to WWAV's senior secured credit facilities.
Fitch projects that Dean will have about $1.3 billion of total debt at Dec.
31, 2013, following the spin-off of its majority ownership in WWAV and the
payment of taxes associated with the divestiture of Morningstar.
Fitch's ratings continue to incorporate Dean's mid-single-digit EBITDA margin,
volatile operating earnings and cash flow, and limited diversification
following the separation of its higher margin and faster growing WWAV and
Morningstar operations. However, these negatives are balanced against the
firm's lowered debt levels, positive free cash flow (FCF) generation, and
historical success reducing costs.
Ratings also consider the fundamental challenges faced by the fluid milk
industry which continues to have excess capacity, experience low-single-digit
volume declines, and exhibit high levels of competition. The dairy industry
also remains highly sensitive to volatile raw milk prices. The Class I mover,
milk used for fluid milk, price averaged $18.30 per hundredweight (cwt) during
the first quarter of 2013, approximately 6% higher than the prior year's
quarter, after increasing to near historical levels of $21.39 per cwt for the
month of December 2012. As of April 2013, the USDA expects the All Milk price
index to increase an average of 6.4% in 2013 to $19.70 per hundredweight in
Pro Forma Credit Statistics and Financial Strategy:
For the LTM period ended Dec. 31, 2012, Dean's consolidated funded
debt-to-EBITDA as defined by its credit facility was 3.54x, down from 5.1x at
Dec. 31, 2010. On a pro forma basis, excluding WWAV's debt, the EBITDA of both
WWAV and Morningstar and the related debt reduction discussed above, leverage
Fitch projects that total debt-to-operating EBITDA, inclusive of five months
of EBITDA from the consolidation of WWAV, could end 2013 at about 2.5x. For
2014, the first full year following the spin-off of WWAV, Fitch is projecting
total debt-to-operating EBITDA of about 2.7x.
Dean expects to finalize details related to the firm's financial strategy over
the next several months but has indicated a desire to achieve and maintain
leverage below 2.5x and to focus on FCF generation. The firm's 2013 guidance,
excluding WWAV, includes EBITDA of $430 million-$460 million, $110
million-$115 million of interest expense, and about $150 million-$175 million
of capital expenditures.
Fitch believes Dean can generate an average of $100 million of FCF annually
post WWAV and Morningstar. However, reported FCF could be negative in 2013 due
mainly to one-time items and cash taxes related to the divestiture of
Core Operations and Operating Strategy:
Post the divestiture of Morningstar and spin-off of WWAV, Dean's core Fresh
Dairy Direct (FDD) business will consist of about $9 billion of annual sales
and, based on management's $430 million-$460 million EBITDA guidance for 2013,
will generate an EBITDA margin in the 5% range. Incorporated in management's
guidance is the expectation that the financial impact of a low-single-digit
decline in volume at FDD, magnified by lost volume associated with a bid for
private-label milk business early in 2013, will be offset by lower corporate
Dean continues to emphasize price realization and volume performance relative
to the industry. The firm is also accelerating cost reduction efforts related
to distribution and manufacturing as well as general and administrative
expenses, announcing plans to eliminate an additional 10%-15% of its
After realizing $300 million from multi-year productivity initiatives since
2009, Dean is targeting another $120 million annual run rate of savings by the
end of 2013. Fitch views the rationalization of processing operations as
necessary given excess industry capacity and competition among processors but
is concerned about the timing given the historical pace of plant closures.
Liquidity, Maturities, and Financial Covenants:
At Dec. 31, 2012, Dean had over $1.7 billion of liquidity consisting of $79
million of cash, $734 million of availability on its $1 billion secured
revolver, $342 million of capacity on its receivables-backed facility, and
$569 million available under WWAV's $850 million secured revolver. Dean's $1
billion revolver expires April 2, 2014 and its $550 million on-balance sheet
account receivables-backed facility matures on March 8, 2015. Fitch expects
the firm to renegotiate its revolver in the near term.
Scheduled maturities of long-term debt at Dec. 31, 2012 were $26 million in
2013, $291 million in 2014, and $32 million in 2015. These maturities consist
mainly of $265 million of outstanding borrowings on the firm's secured
revolver and required term loan amortization payments. As previously
mentioned, Dean repaid the outstanding balance on its revolver and all term
loans following the divestiture of Morningstar in January resulting in no
significant maturities until 2016.
Financial maintenance covenants in Dean's credit facility currently include
maximum total and senior secured leverage ratios. The calculations exclude up
to $100 million of unrestricted cash and adjust for charges and non-recurring
items; therefore, bank leverage ratios are modestly lower than those
calculated by Fitch.
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 3.54x and 1.96x, respectively at Dec. 31, 2012,
which indicates EBITDA cushion in excess of 30%.
Future developments that may, individually or collectively, lead to a positive
rating action include:
--Total debt-to-operating EBITDA consistently near 2.5x or less, due to EBITDA
materially above $450 million or stable-to-declining debt levels;
--Good cash flow from operations and FCF generation;
--The successful elimination of additional fixed costs, the absence of
significant volume declines, and the maintenance of market share would also be
required for future rating upgrades.
Future developments that may, individually or collectively, lead to a negative
rating action include:
--Total debt-to-operating EBITDA sustained above 3.5x due to a material
increase in debt or EBITDA meaningfully below $400 million for a prolonged
period could trigger a downgrade in ratings;
--Multiple years of negative FCF generation and an acceleration of volume
declines could also result in negative rating actions.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Fitch: Dean Foods' Ratings Not Immediately Affected by Agreement to Sell
Morningstar' (Dec. 3, 2012);
--'Fitch Upgrades Dean's IDR to 'B+'; Places on Rating Watch Positive' (05 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).
Applicable Criteria and Related Research
High-Yield Food, Beverage, Restaurant, and Consumer Products Handbook
Corporate Rating Methodology
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Carla Norfleet Taylor, CFA, +1 312-368-3195
Fitch Ratings, Inc.
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