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S&P rates Michael Foods notes B+
Standard & Poor's assigned its B+ rating to egg producer and distributor Michael Foods Inc.'s proposed $595 million senior secured credit facility.
Standard & Poor's has also affirmed its B+ corporate credit rating on Michael Foods and assigned a B- rating to both the $135 million senior unsecured term loan due 2011 and the $150 million senior subordinated notes due 2013. The outlook is positive.
In conjunction with Michael Foods' new senior unsecured notes and subordinated notes, proceeds of the proposed new facility will be used to finance the company's purchase by Thomas Lee Partners and its senior management. The buyout, announced on Oct. 13, is valued at $1.05 billion.
The ratings reflect Michael Foods' anticipated debt leverage following the sale, which would be high relative to the company's ability to generate cash flow. There are also a large number of competitors within Michael Foods' categories. Somewhat mitigating these concerns is the company's solid market position as the leading producer and distributor of egg products, with an estimated 44% U.S. market share.
The transaction will modestly lower Michael Foods' debt service costs because of the lower interest rate environment. However, the company will carry a higher absolute level of debt.
S&P expects that pro forma lease-adjusted EBITDA coverage of interest expense will be above 3x for the fiscal year ending Dec. 31, compared with about 2.9x the previous year. Upon closing, lease-adjusted total debt will increase to $768 million, up from about $474 million at June 30, 2003. Pro forma lease-adjusted total debt to EBITDA will likely be about 4.8x at fiscal year-end Dec. 31, 2003.
S&P expects the company to pay down debt with its free cash flow and does not anticipate sizable acquisitions in the intermediate term. As such, S&P expects credit protection measures to improve modestly in the next few years.
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