Moody's downgrades Milk Specialties

Moody's Investors Service said it downgraded Milk Specialties Co.'s corporate family rating to B3 from B2, its probability of default rating to Caa1-PD from B3-PD and its $35 million senior secured revolving credit facility due 2017 and $250 million senior secured first-lien term loan due 2018 to B3 (LGD3, 36%) from B2 (LGD3, 35%). The outlook remains stable

The agency said the downgrade was largely driven by the likelihood that the company's profitability will remain below Moody's expectations for the next few quarters. Margins have weakened primarily because of relatively high input costs, Moody's said, and leveraged has increased to 4.6 times at Dec. 28 from 4.1 times at the end of June as a result.

The company's leverage and interest coverage covenants were tight at Dec. 31 and are expected to step down quarterly. Moody's believes that a covenant waiver may be necessary in the next few months if margins do not rebound.

The B3 corporate family rating reflects Milk Specialties' small though improving scale, relatively high leverage, low margins that have been under pressure the last few quarters, cash flow constrained by large capital investments, the company's lack of product diversification because of its focus within niche human and animal nutrition segments and an adequate but not strong liquidity profile, Moody's said.

The rating benefits from the company's leadership position as an independent processor of whey protein in the United States, good customer diversification and a growing network of independent whey stream suppliers, Moody's said.

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