Bimbo credit rating downgraded by Moody's

by Josh Sosland
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MEXICO CITY — Moody’s Investors Service has downgraded the senior unsecured issuer and Mexican national scale ratings of Grupo Bimbo S.A.B. de C..V. to Baa2 and Aa2.mx. The previous ratings were Baa1 and Aaa.mx, respectively.

The downgrade was triggered by the completion of Bimbo’s $2.5 billion acquisition of the U.S. fresh bakery business of Weston Foods, Inc. The transaction was financed by debt and raises the company’s debt to EBITDA ratio to 3.5 times from 1.3. Total debt was estimated at $3.5 billion, up from $1.2 billion.

"The Weston Foods acquisition significantly enhanced Bimbo’s business profile in the U.S. and improves the company’s geographic diversification, but also weakens its credit metrics because of a material post-transaction debt load," said Sebastian Hofmeister, Moody’s vice-president.

Estimating the company’s financials on a pro-forma basis, Moody’s said the acquisition raises Bimbo’s revenues by 35%. The U.S. share of the company’s revenues climbed with the acquisition to 40% from 22%, and EBITDA rises to 28% from 5%. Conversely, the Mexico Bimbo business declined to 50% of sales from 64% and EBITDA declines to 65% from 85%. The remainders come from Latin America operations.

Moody’s warned that the difficult world finance situation leaves Bimbo, which will need to refinance debt shortly, vulnerable to a further downgrade.

In particular, the company received $600 million of 1-year bridge financing that is part of the $2.3 billion financing package for the acquisition.

"The ratings could be confirmed if the bridge debt is fully refinanced with long-dated debt during the next several months," Moody’s said. "By contrast, without refinancing by mid-2009, a downgrade could be forthcoming."

The Moody’s rating is premised on the expectation that Bimbo will reduce debt in the coming years. The agency said it is looking for a debt to EBITDA ratio of 2.5 noting that the company’s executives said in a Dec. 10 conference call that a ratio of 2.0 is a "sound longer term leverage target," one that the company projected could be reached in two to three years.

"The acquisition improves Bimbo's competitive position in the U.S. by complementing the company’s existing operations in the western part of the country with Weston Foods' significantly more profitable presence on the East coast," Moody’s said. "The transaction creates one of the largest branded baked-goods businesses in the U.S., expands Bimbo’s product portfolio with various well-known national and regional baked-goods brands and will allow for broader distribution of Hispanic brands in the East and better access to Midwestern markets. The company's U.S. manufacturing footprint will grow from 13 to 35 plants while the number of U.S. distribution routes more than doubles. Its increased scale and scope should also improve Bimbo's purchasing terms and strengthen its clout with major U.S. retailers. The limited overlap between new and existing operations in the U.S. implies manageable integration risks. "

Moody’s predicted the acquisition would quickly strengthen U.S. margins but with a more modest impact on overall company margins. Additionally, considerable uncertainty surrounds that prospect. In the year ended Oct. 4, Weston’s EBITDA margin was 12.5%, eclipsing Bimbo’s consolidated margin of 11.6%. Still, the 12.5% was four points better than Weston’s margin in the previous four years.

Moody’s was upbeat about how Bimbo would fare in the current weak economic environment because of the "defensive nature of the branded packaged food sector and an increase in the number of meals at home."

A continuing positive for Bimbo is the company’s top, high-margin position in the Mexican market.

"The company benefits from an extensive proprietary distribution system that represents an important barrier to entry against international competitors," Moody’s said. "Bimbo derives most domestic revenues from mom and pop stores, resulting in a significantly smaller exposure to major retailers than in the U.S. and limited working capital funding needs as most transactions with these types of points of sales are cash-based."

The company also has a strong position in the confectionery and salty snacks markets in Mexico.

Returning to credit issues, Moody’s said Bimbo’s metrics will deteriorate because of the newly assumed debt and the acquisition valuation of 8.6 times EBITDA and 1.1 times sales, levels in line with valuations typical for the packaged food sector, Moody’s said.

Expanding on the refinancing issue, Moody’s said, "Post-acquisition, Bimbo's liquidity is weak because of near-term refinancing risk related to $682 million in debt coming due over the next 12 months (including bridge debt and $82 million in certificados bursatiles due in August 2009), which significantly exceed Moody's estimates for the company's post-acquisition cash and 2009 free cash flow. An additional $600 million in debt matures in July 2010 when its currently fully drawn 5-year revolving credit facility expires. Key financial covenants under the company's acquisition facilities include a maximum debt to EBITDA ratio of 3.5 and minimum EBITDA to interest ratio of 3.25, both of which are acceleration covenants.

"For 2009, Moody's expects Bimbo to maintain relatively modest cushion under the leverage covenant. The company currently maintains $160 million in un-drawn committed revolving credit facilities due in May and November 2009."

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