William Toler, Hostess
William Toler, president and c.e.o. of Hostess Brands, intends to retire March 1, 2018, or sooner if a replacement is named.

KANSAS CITY – While Hostess Brands, Inc. has enjoyed strong sales growth and impressive profit margins, a leadership transition at the company could be cause for caution, according to Moody’s Investors Service.

The observations about Hostess were made in connection with a $994 million first lien term loan issued Nov. 20 to Hostess Holdco, L.L.C. and subsidiaries. Moody’s assigned a B1 credit rating to the loan.

With a maturity date of Aug. 22, 2022, the loan replaced a different first-lien loan of the same amount and maturity date. The interest rate of the earlier loan was 25 basis points higher. Moody’s said the credit outlook of Hostess is stable.

Hostess Holdco is a subsidiary of Hostess Brands, Inc.

Explaining the rating, Moody’s said Hostess has “modest financial leverage” and has performed well but faces challenges going forward, including a leadership transition.

Financial pluses include debt at about 4.5 times EBITDA, above-average sales growth within its peer group (about 6%), high profit margins (approximately 30% EBITDA to sales) and good liquidity and cash flow.

“These positive factors are balanced against risks related to the company's relatively small scale, concentrated plant operations and limited long-term growth potential within its core product category of packaged sweet baked goods,” Moody’s said. “Additionally, the company is in the process of searching for a new c.e.o., which could lead to governance challenges and possible future strategy shifts.”

Debt rated in the B family “are considered speculative and are subject to high credit risk.”

Moody’s said the Hostess ratings could be downgraded if the company’s financial performance worsens or if Hostess pursues a leveraged acquisition that would boost the company’s debt-to-EBITDA above 5 times. Conversely, an upgrade could be in the works if the company “successfully manages growth,” diversifies its base of profitability and reduces debt-to-EBITDA beneath 40 while maintaining strong liquidity.