NEW YORK — Moody’s Investors Service has downgraded the corporate family rating of Parsippany, N.J.-based B&G Foods, Inc. to B1 from Ba3 and its probability of default rating to B1-PD from Ba3-PD. The ratings agency also assigned a Ba3 rating to the company’s newly proposed 7-year $500 million term loan B and downgraded the company’s speculative grade liquidity rating to SGL-2 from SGL-1.
Moody’s said the rating actions conclude its “review for downgrade” that was initiated on Sept. 3 following the company’s announcement that it plans to acquire the Green Giant and Le Sueur branded canned and frozen vegetable business from General Mills, Inc. for approximately $765 million.
The B1 corporate family rating reflects B&G’s “high leverage, increasingly aggressive financial policies, relatively large dividend payments, small but improving scale relative to more highly rated industry peers, an acquisitive growth strategy, and periodic use of leverage to fund acquisitions,” Moody’s said.
“Pro forma leverage is currently high, but we anticipate some deleveraging to occur during the next 12 to 18 months driven by both mandatory term loan amortization and EBITDA growth,” the ratings agency said. “The rating also incorporates the potential challenges associated with entrance into the frozen arena and the potential for integration risks associated with the Green Giant acquisition. The company’s credit profile benefits from its relatively high margins (despite the inclusion of lower margin Green Giant), consistent cash flow generation, a broad product portfolio and a largely successful track record of integrating acquisitions (albeit on a smaller scale than Green Giant).”
According to Moody’s, B&G’s corporate family rating and probability of default rating were downgraded largely based on the high pro forma leverage (roughly 6 times debt-to-EBITDA on a Moody’s adjusted basis) and lower margins expected to result from the pending debt-funded Green Giant acquisition, as well as potential for significant integration risks. Meanwhile, the speculative grade liquidity rating was downgraded primarily because cash balances will be moderate while a significant portion of the company’s revolving credit facility will be used to fund the acquisition, Moody’s said.
“Moody’s believes B&G could encounter integration challenges associated with the Green Giant acquisition, as the frozen category represents uncharted territory and the acquisition is the largest ever for B&G,” Moody’s said. “Moreover, the Green Giant business generates lower margins. B&G has historically operated as a relatively asset-lite entity due to its largely co-packer model, but post-close the company will be the owner and operator of Green Giant’s Mexican plant, which manufactures frozen goods and employs more than 1,100 workers. In addition, the company’s high post-acquisition category concentration in shelf-stable and frozen vegetables will likely result in a weaker overall credit profile as both categories have been under pressure during the last few years due to both competitive factors and shifting consumer preferences toward fresh food.”
In issuing its stable outlook for the company, Moody’s said it expects B&G’s leverage will improve but remain elevated during the next 12 to 18 months. The ratings agency also expects the company to continue to generate solid cash flow that may be used for debt repayment, including mandatory amortization on its term loan A and B facilities.Moody’s has not ruled out an upgrade to B&G’s ratings, saying they could be upgraded if the company is able to integrate Green Giant with minimal challenges, sustain debt-to-EBITDA below 5 times even considering a continuation of its acquisition based growth strategy, and improve RCF-to-net debt such that it approaches 10%. Alternatively, the ratings could be downgraded if the company experiences material integration issues with Green Giant, adjusted debt-to-EBITDA is sustained above 6 times, if RCF-to-net debt weakens and is sustained below 5%, or if liquidity deteriorates and revolver borrowings increase.