S&P: U. K. Poultry Producer Moy Park Ratings Lowered To 'BB-' Following Downgrade Of Its Parent JBA S. A.; Outlook Stable
At the same time, we lowered to 'BB-' from 'BB' our issue ratings on the existing ?300 million senior unsecured notes due 2021. The recovery rating on these notes is unchanged at '3', reflecting our expectation of average (50%-70%) recovery in the event of a payment default.
Brazil-based meat processor JBS S. A. owns Moy Park. Its liquidity position has weakened to less-than-adequate following two consecutive quarters of cash drain caused by poor working capital management, lower-than-estimated operating cash flows, and the liquidation of derivative positions. JBS' financial flexibility has diminished--it still has sizable short-term maturities and is finding hard to restore its margins at the group's main businesses, such as the U. S. beef and Brazilian poultry operation at Seara. As a result, we have downgraded JBS to 'BB' and revised the group credit profile (GCP) to 'bb'. The GCP forms the basis for our assessment of the group support available to Moy Park.
Moy Park is fully consolidated into JBS' operations and financial reporting and still meets our criteria definition of an entity that is strategically important to the group (see "Group Rating Methodology," published Nov. 19, 2013, on RatingsDirect). Our assessment is supported by our understanding that JBS S. A. is unlikely to sell Moy Park, that Moy Park is a part of the group's long-term strategy, and that Moy Park is reasonably successful at what it does. Given its group status, Moy Park's issuer credit rating is capped at one notch below the GCP. Because the GCP has been revised down, Moy Park will no longer benefit from a one-notch uplift for group support.
Moy Park's business risk and financial risk profiles remain unchanged at weak and significant, respectively. We combine these to derive the 'bb-' anchor. The business risk assessment reflects Moy Park's geographic concentration in the U. K., Ireland, and France; limited product diversity, with over 75% of revenue derived from poultry products; and significant exposure to private label retailers, which tend to enjoy lower margins than branded products. These weaknesses are offset by Moy Park's position as the second-largest poultry producer in the U. K. and its strong market positions in the "chilled" and "ready-to-eat" segments.
We also view positively the supporting market conditions--market demand for poultry remains steady in the U. K. and management enjoys a track record of managing volatile raw material prices and avoiding disease outbreaks in its operations. We expect Moy Park to continue to record competitive profitability metrics compared with industry averages. That said, we see the product concentration and deflationary retail environment as significant challenges that limit the potential for a stronger business risk assessment at this time.
Our financial risk profile assessment reflects our forecast that Moy Park's S&P Global Ratings-adjusted debt-to-EBITDA ratio will be about 3.0x-3.5x in 2016 and 2017. Adjusted debt stood at ?405 million as of Dec. 31, 2015. The totals included trade receivables sold, operating leases, and unamortized borrowing costs of approximately ?78 million. For the 2015 financial year, reported revenue stood at ?1.44 billion and adjusted EBITDA at ?117 million. We expect steady top-line growth and improved profitability going forward. We forecast that earnings will increase modestly, mainly based on volume growth, continued efficiency gains, and product innovation in poultry production. We anticipate that adjusted free operating cash flow will be at least ?25 million as we expect working capital movements to be largely neutral and capital expenditure (capex) to be between 4%-5% annually. The EBITDA interest coverage metric is likely to remain strong at 5x-6x, and as such we expect Moy Park will be able to comfortably meet the interest payments on its ?300 million senior notes due 2021.
In our base case, we assume: Revenue growth of 2%-4%, reflecting modest increases in consumer demand, offset by deflationary price pressures. Modest improvement in profitability driven by management's continued efficiency programs and procurement savings. Annual capex of about 4.5%-5.5% of revenues. Negligible movement in working capital requirements and no acquisitions. No dividend payments or early redemption of outstanding bonds. Based on these assumptions, we arrive at the following credit metrics:Stable operating performance, resulting in adjusted EBITDA margins of 8.0%-8.5% in 2016 and 2017.Adjusted debt to EBITDA of 3.0x-3.5x in 2016 and 2017.Adjusted EBITDA interest coverage of 5.0x-6.0x in 2016 and 2017.The stable outlook reflects our view that Moy Park will maintain fairly stable revenues and profitability enabling its adjusted debt-to-EBITDA to remain at 3.0x-3.5x and its EBITDA interest coverage to be 5.0x-6.0x while generating modest free cash flow, over the next 18-24 months. We also expect JBS S. A. to improve its operating performance by focusing on efficiency and exploiting its diverse product offerings so as to preserve debt protection metrics and generate cash flows. We do not expect Moy Park's financial policy to change--management has stated that the group has no plans to increase debt leverage from current levels through debt-financed acquisitions or a step-up in the distribution of funds to shareholders.
We could lower the rating should we lower the rating on its parent JBS, all other things being equal. This would likely occur if Moy Park's SACP was 'bb-' or lower and JBS's operating performance and cash flow generation weakened. This would result in higher leverage metrics for JBS than we forecast in our base case and a deteriorating liquidity position.
We could raise the ratings on Moy Park if JBS' operating performance and liquidity profile were to improve, causing us to raise our rating on it. This could occur if JBS were to enhance profit margins on its beef and poultry operations while improving its working capital management and extending its debt maturity profile. Alternatively, if the GCP remained at its current level and Moy Park's financial risk profile were to strengthen, with debt-to-EBITDA below 3.0x on a sustainable basis, we could revise upward its financial risk profile and raise the rating by one notch.