Moody's Investors Service has today upgraded the corporate family rating (CFR) and the probability of default rating (PDR) of Campofrio Food Group, S.A.. (Campofrio, or the company) to Ba3 and Ba3-PD from B1 and B1-PD respectively. Concurrently, Moody's has upgraded to Ba3 from B1 the rating of the company's senior notes due 2016. The outlook is stable.
RATINGS RATIONALE
The rating action follows on from the conclusion of Moody's review of the acquisition of Campofrio by a consortium led by Sigma Alimentos, S.A. de C.V. (Sigma, Baa3 negative) and WH Group Limited (formerly Shuanghui International). In December, 2013, the two companies had filed a joint tender offer for the remaining shares of the company and following regulatory approvals the tender process was successfully finalised on June 10 2014 reaching 98.3% of the total Company´s shares, which is in the process of being delisted from the Madrid and Barcelona Stock Exchanges. Sigma and WH Group now own 61.4% and 36.9% respectively of Campofrio, while additional shares purchases are still taking place aiming to acquire 100% of the Company.
Whilst Sigma is expected to consolidate Campofrio into its accounts, Campofrio is still currently financed on a standalone basis and this is not expected to change in the near term. Whilst Campofrio's standalone credit is equivalent to a B1 profile, the upgrade recognises that its acquisition by a strong industry player is credit positive.
Moody's will continue to assess the extent of Campofrio's integration into Sigma, and the benefits accruing from such integration. These may include various cost synergies, and also revenue synergies through access to new distribution markets, which together may benefit revenues and margins. Moody's will also review the extent of possible financial integration of Campofrio with Sigma. Including any potential future financial support from Sigma which could eventually result in a higher rating outcome. However, Moody's notes that the JV nature of the acquisition may complicate such arrangements, with Sigma having four board seats and WH Group having three.
In its trading statement for the three months ended 31 March 2014, Campofrio reported total net revenues down by 1.2% year-on-year to EUR436 million due to lower meat prices off-set by higher volumes which were up by 2.1% year-on-year. Due to lower meat costs and lower overheads, reported EBITDA for the quarter rose by 9.9% to EUR27.9 million. Operating cash flow was negative during the quarter mainly due to an increase in working capital out flow which is expected to unwind during the coming quarters. The adjusted Debt/EBITDA ratio marginally reduced to 5.5x at the end of the quarter from 5.6x as of 31 December 2013
RATING OUTLOOK
The stable outlook is based on the expectation that on a standalone basis the company will maintain its current operating performance and achieve further gradual deleveraging combined with improvement in its adjusted EBIT margin.
WHAT COULD CHANGE THE RATING UP
The ratings could be upgraded depending upon the extent of Campofrio's integration into Sigma as described above, and the benefits accruing from such integration. On a standalone basis, there could be upward pressure on the rating if there is an improvement in the company's profitability leading to sustainable adjusted Debt/EBITDA of around 4.0x, combined with a material improvement in the adjusted EBIT margin while generating positive free cash flow and maintaining a good liquidity profile.
WHAT COULD CHANGE THE RATING DOWN
On a standalone basis, the ratings could be downgraded if adjusted Debt/EBITDA increases materially above 6.0x. Any concerns about liquidity or significant negative trends in the company's key markets are also likely to result into downward rating pressure.
PRINCIPAL METHODOLOGIES
The principal methodology used in this rating was the Global Packaged Goods published in June 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Madrid, Campofrio is the largest producer of processed meat products in Europe. In 2013, Campofrio generated approximately EUR1.9 billion revenue and EUR146 million normalised EBITDA.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
