Fitch affirms Flowers' ratings at 'BBB'
by Eric Schroeder
NEW YORK — Fitch Ratings has affirmed several ratings of Flowers Foods Inc., including the company’s issuer default rating at “BBB,” its $500 million revolving credit facility at “BBB,” its $400 million senior unsecured note at “BBB,” and its $68 million term loan A at “BBB.” Fitch maintained its “stable” outlook for the Thomasville, Ga.-based company.
The “BBB” investment grade represents medium class companies that are satisfactory at the moment.
“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,” Fitch said. “Flowers is a low-cost operator in a highly mature industry. The firm has generated low single-digit organic revenue growth rates, even though industry volumes have been slightly negative, due to its ability to price for these daily consumed staples. Flowers has steadily increased its market share over time.”
Fitch said Flowers’ credit protection measures remain “good but are not at historically strong levels.” Meanwhile, the ratings agency noted that Flowers has been “under-levered” and has 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,” Fitch said. “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.”
Flowers’ acquisitions over the past two years have removed a qualitative constraint on upward rating movements, Fitch said. But the ratings agency noted that leverage is likely to continue to increase above historical levels through 2013, and it anticipates that credit protection measures will be weak for the current rating category in the near term.
With Flowers committed to using internally generated cash flow to reduce debt within 18 to 24 months after it closes on the Hostess Brands, Inc. asset purchase this year, Fitch said it expects 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).”
Flowers pending acquisition of five Hostess bread brands, including Wonder, Merita and Butternut, along with 20 bakeries and other assets for $360 million, likely is to be largely debt financed, Fitch said. As a result, Fitch expects the company’s leverage to increase moderately in 2013, and debt may 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,” the ratings agency said. “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.”
Fitch said an upgrade beyond “BBB” is not anticipated in the near term, but 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 said.