Fitch affirms Flowers' ratings, outlook is stable
by Eric Schroeder
NEW YORK — Fitch Ratings has affirmed the issuer default rating, revolving credit facility and term loan A of Flowers Foods Inc. at BBB, while issuing a “stable” outlook for the Thomasville, Ga.-based company.
Fitch noted that Flowers’ credit protection measures “are very strong,” with leverage (debt/EBITDAR) less than 2.5 times (x) in each of the past five years.
“Flowers’ has a fair amount of rental expense given that it leases a substantial portion of its distribution facilities, thrift store locations and equipment to grow its business,” Fitch said. “As a result, rents add more than one turn to leverage and thus the focus on EBITDAR as a primary measure of leverage.”
The ratings agency said Flowers has ample liquidity with $260 million in revolver availability as of Dec. 31, 2011, and modest debt maturities throughout the medium term.
Regarding the company’s stable outlook, Fitch said Flowers’ outlook is supported by the expectation that management “will be prudent in managing its credit protection measures while executing its growth strategy. Further, there is room within the rating and enough liquidity to manage moderate acquisitions and short-term pressure on free cash flow due to volatile commodity costs as discussed below.”
Fitch said Flowers’ intends to participate in consolidation in a meaningful way, and the company is accelerating its growth strategy to serve 75% of the U.S. population by 2016 from 61% at the end of 2011, with annual revenue growth targets in the 5% to 10% range. Organic growth is expected to be 3% to 5% annually and merger and acquisition activity will provide the remaining 2% to 5%, Fitch said.
Looking at potential catalysts for rating movements, Fitch said downward pressure may arise if leverage increased materially and did not revert to below the 3 times within 12 to 18 months.
“At this level the company is able to execute moderate debt financed acquisitions and endure some periods of negative FCF without impacting its ratings,” Fitch said. “Accretive acquisitions would provide the flexibility to increase debt beyond this level. Upgrades are not anticipated in the near-term due to the company's growth plans for the next 5 years, which will include acquisitions and additional leverage.”