Fitch Rates Premier Foods 'B(EXP)' on Proposed Refinancing

March 4 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has assigned Premier Foods plc (LSE: PFD.L - news) (PF) and Premier Foods Finance plc the following expected ratings, upon completion of the pending refinancing:

Premier Foods plc

Long-term Issuer Default Rating (IDR): 'B(EXP)', Outlook Positive Premier Foods Finance plc

GBP475m planned Senior Secured Fixed Rate Notes due 2021: 'B(EXP)'/'RR4'

The 'B(EXP)' IDR reflects PF's market position as one of UK's largest ambient food producers, with a diversified portfolio of leading brands across five categories and with strong or leading competitive positions in well-established categories ranging from ambient cakes to flavourings and seasonings. The combination of a successful re-negotiated long-term pension reduction schedule, rights offering, notes issue, completion of the capital structure refinancing and sale of 51% of PF's bread division would provide PF with operational and financial headroom, eliminating short-term concerns and facilitate greater management focus on the business.

The Positive Outlook reflects Fitch's expectation that PF's financial and business profile should improve over time when the major refinancing and equity placing and rights issue efforts and the deconsolidation of its bread division are completed. It also factors confidence in the positive momentum that PF's grocery only business enjoys thanks to management's category-led strategy. Should credit metrics remain near Fitch's expectations the ratings could be upgraded to 'B+'.

The expected ratings are assigned under the assumption that the planned refinancing of PF's current senior secured credit facility (GBP884m) with a new senior secured revolving credit facility (GBP300m) and repayment from the proceeds of a proposed senior secured notes (GBP475m) and the equity placing and rights issue (GBP350m) go ahead as planned. As part of this restructuring plan, PF is to agree a new pension deficit reduction schedule with its pension trustees which will substantially reduce its annual cash contributions with fixed contributions until 2019. The pension deficit reduction agreement is conditional upon a successful rights issue of at least GBP250m in gross proceeds at the latest on 30 June 2014. Final instrument ratings would be contingent upon the receipt of final documentation conforming materially to information already received. Failure to conduct the refinancing according to plan would result in the withdrawal of the ratings.

Premier Foods Finance plc, the issuer of the planned notes, is a financing vehicle 100% owned by PF. The notes and the senior secured revolving credit facility (RCF) of GBP300m will be secured substantially by all of the issuer's and guarantors' assets representing 97% of the group's consolidated total assets as of 31 December 2013. The notes, RCF and pension trustees will maintain a security sharing mechanism. The security offered to the pension funds will rank pari passu with the notes and bank debt, limited to a maximum amount of GBP450m although, as pension contributions reduce the deficit, security to the benefit of the pension fund will not reduce below GBP350m.

KEY RATING DRIVERS

Leading UK Ambient Food Producer

PF is one of the UK's largest ambient food producers, with a 4.7% market share in the fragmented and competitive GBP28bn UK ambient grocery market. PF manufactures, distributes and sells a wide range of branded and non-branded foods, across five categories with leading brands, some of which has been in existence for more than 100 years. The company therefore benefits from its diversity and scale in terms of manufacturing, logistics and procurement in the UK.

Reliant on the UK

PF operates mainly in the UK and a significant portion of its turnover is from the 'big four retailers' in the UK - Tesco (Frankfurt: TS3.F - news) (BBB+/Negative), Asda, J Sainsbury's and Morrisons. However, it is active in categories generally not core to multinational food manufacturers, which therefore limits competitive threats. In addition, PF has a competitive position in many of its food categories where it holds a number one or two market position. PF is also expanding across geographies. In October 2013, PF signed a ten-year partnership agreement with Swire Foods Holdings Ltd, to distribute Ambrosia rice pudding pot in China. This agreement may extend to PF's other brands in the portfolio.

Standalone JV for Bread Division

The deconsolidation of the bread business through a standalone JV with the Gores Group will allow management to focus its full attention and resources on continuing to grow its grocery business. PF would be left with a higher margin business (EBITDA margin of 18.7% in FY14E) compared with 11.9% in FY13 (before deconsolidation). Fitch understands that other than the GBP15.7m (PF's share of the committed GBP32m investment) to be invested in the JV on completion in FY14 and the potential GBP6.4m (PF's share of the remaining GBP13m investment) in 2016, there will be no future cash requirements from Premier Foods for the JV as future investments for the bread division will be funded by internal cash flows of the JV and external funding. Fitch assumes PF will not guarantee any of this potential external funding.

Strong Grocery Margins

Fitch projects that EBITDA margin will increase to around 20% in FY16 from 18.7% in FY14 (Fitch's estimate post-disposal of bread division). Although this depends on the future level of marketing investments, our expectation of improved margins relates to cost savings and efficiency initiatives that PF has undertaken since 2012 as part of its ongoing effort to simplify the business following its disposal activity during 2011-2013. PF exceeded its 2012 GBP20m target by delivering savings of GBP48m and delivered a further GBP20m savings in 2013.

Weak Credit Metrics

The business strengths are offset by PF's weak credit metrics. Despite the new agreed pension deficit reduction schedule, Fitch estimates that the pension deficit contribution has a 1.4x-1.9x adverse impact on FFO adjusted net leverage over FY13- FY16. Fitch projects FFO adjusted net leverage will be 5.9x in FY14 (post-refinancing) but should marginally reduce to 5.7x by 2016. The agency expects FFO fixed charge coverage to be around 2x over FY14-FY16. In addition to high interest costs, PF's FFO is compressed by recurring pension deficit contributions, which Fitch includes in the calculation of FFO. Higher than expected pension deficit contributions or post-refinancing cost of funding would, among other factors, have an adverse impact on projected credit metrics and could in turn affect rating headroom.

Adequate Liquidity

Fitch anticipates that post-refinancing, PF's liquidity will be adequately supported by a renegotiated GBP350m RCF due in 2019 with appropriate covenant headroom and by the lack of material short-term debt maturities in the next five years apart from the negotiated pension deficit contributions (ranging from GBP7m p.a. in FY15 to GBP45m in FY17-FY19) and the GBP120m securitisation facility due December 2016 (expected to reduce to GBP60m post-deconsolidation of the bread business).

Senior Secured Notes' Rating

The 'B(EXP)'/'RR4' senior secured rating reflects Fitch's expectations that the enterprise value of the company and the resulting recovery of its creditors (including the pension trustees) would be maximised in a restructuring scenario (going concern approach) rather than a liquidation due to the asset-light nature of the business as well as the strength of its brands. Furthermore, a default scenario would likely be triggered by unsustainable financial leverage, possibly as a result of weak consumer spending or unexpected higher pension deficit contributions. As such, Fitch applied a 30% discount to EBITDA and believes a distressed multiple of 6.0x is appropriate. This results in average expected recoveries (31%-50%) for senior secured noteholders in the event of default.

RATING SENSITIVITIES

Positive: Future (Other OTC: FRNWF - news) developments that may, individually or collectively, lead to positive rating action (an upgrade to 'B+'/Stable) include:

- PF's ability to maintain EBITDA margin above 18% after having sufficiently invested in A&P to protect its market position and drive growth with its category-led strategy.

- FFO adjusted net leverage demonstrating a path moving sustainably below the 5.5x-6.0x range (pension deficit contributions are included in the calculation of FFO).

- FFO fixed charge coverage above 2.0x on a sustained basis.

- Free cash flow margin above 4% after adequate capital investments.

Negative: Future developments that may, individually or collectively, lead to negative rating action (revision of the Outlook to Stable) include:

- Reduced free cash flow margin below 4% of sales as a result for instance of profitability erosion, higher capex or unexpected increases in pension contribution or funding costs.

- FFO adjusted net leverage remaining in the 5.5x to 6.0x range on a sustained basis (pension deficit contributions are included in the calculation of FFO).

- FFO fixed charge coverage below 1.8x on a sustained basis.