Moody's rates Merisant notes Caa1

Moody's Investors Service downgraded the ratings of Merisant Co. and assigned a Caa1 rating to the proposed $75 million senior subordinated discount notes to be issued by Tabletop Holdings Inc., the holding company of Merisant.

Proceeds from the Tabletop discount notes are planned to fund a payment to equity owners, including majority owner Pegasus Capital Advisors. The ratings outlook is stable.

Downgraded by Moody's were the ratings of Merisant's $35 million revolving credit facility that matures 2009 - to B1 from Ba3; $50 million Euro term loan A maturing 2009 - to B1 from Ba3; $255 million term loan B maturing 2010 - to B1 from Ba3; and $225 million senior subordinated notes due 2013 - to B3 from B2.

The ratings downgrade of Merisant reflects the cumulative increase in enterprise leverage resulting from this and a larger equity distribution in July, and the potential that future distributions will keep leverage higher than previously expected.

In addition, Moody's notes that although Merisant's margins and cash flow have been strong, sweetener markets and the food retail environment are increasingly competitive, which may constrain future cash flow generation levels.

Merisant's ratings are limited by the company's relatively small size ($359 million for last-12-month revenues) and largely single product focus (aspartame sweetener for tabletop use), its reliance on a limited number of brands ('Equal' in the US and 'Candarel' in overseas markets), and a business environment that is expected to grow more competitive from both competing products and a consolidating retail segment.

In addition, the ratings take into account the leverage taken on by the enterprise this year to fund shareholder distributions, and the possibility that Pegasus may continue to monetize accreted value from Merisant, via dividends or other mechanisms, as it becomes available.

Pro forma for the transaction, Merisant's total debt (including the planned Tabletop discount notes considered at a nominal value of $75million) will be about $555 million (considering $20 million in debt amortization subsequent to June 30), yielding a total debt to June 30 last-12-month EBITDA level of 5.0x.

The leverage is considerable as measured against EBITDA but more moderate in relation to the company's strong cash flow, which in the last 12 months has allowed debt reduction of roughly $63 million (or 11% of pro-forma total debt), implying good de-leveraging capability for the rating level.

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