Hostess rating balances success against brief track record.

NEW YORK – Financial policies that have been and are likely to remain aggressive and the company’s limited operating track record are factors holding down the credit ratings of Hostess Brands L.L.C., according to analysis just issued by Moody’s Investors Services. The ratings agency said the negatives are balanced against the financial success of the Hostess relaunch and of its core well-known brands sold through direct-to-warehouse distribution, generating high profit margins, holding good future growth prospects and the company’s liquidity. Moody’s issued credit ratings for the company and its proposed new credit lines (see related story beginning on Page 1). Ratings include a B2 corporate family rating (speculative and subject to high credit risk). Moody’s assigned a B1 rating to a proposed $100 million first lien revolving credit facility and proposed $825 million first lien term loan. Moody's assigned a Caa1 rating (speculative and of poor standing) to Hostess' proposed $400 million second lien term loan.

The Moody’s ratings announcement featured considerable analysis of the Hostess business, including the disclosure that Hostess sales reached $577 in the year ended March 31.

The agency said proceeds from the new Hostess debt will be used to fund a $905 million distribution to shareholders and refinance $344 million of existing debt.

Moody’s said Hostess is operating in a far healthier environment than the company that went bankrupt in November 2013 and liquidated.

“Hostess’ cost profile is significantly lower and its operating flexibility much greater than its predecessor company, which was encumbered by strict labor union restrictions, heavy pension obligations, overcapacity, and high distribution expenses associated with a direct-store delivery system,” Moody’s said. “Hostess began operating in July 2013 through a newly established direct to warehouse distribution system, and sales have since grown to $577 million for the 12 months ended March 31, 2015. The company currently operates three bakery facilities with products sold across the United States.”

Hostess received a stable ratings outlook from Moody’s, reflecting an expectation the snack cake maker will be able to profitably expand its operations. This in turn should facilitate “a steady pace of leverage reduction over the next 12 to 18 months.” Still, Moody’s expects total financial leverage to remain high.

Were earnings to come under pressure or liquidity were to deteriorate, a ratings downgrade could result, Moody’s said. A debt-to-EBITDA ratio holding above 6 times also could trigger a downgrade.

Moody’s also assigned Hostess a B2-PD probability of default rating, a rating defined as “speculative and subject to high default risk.”