S&P: Bumble Bee Holdings Inc.'B' Rating Affirmed; Liquidity Assessment Revised To Less Than Adequate; Outlook Stable
At the same time, we affirmed our 'B' issue-level ratings on the company's $605 million senior secured notes maturing in December 2017. The recovery ratings remain '3', indicating our expectations for meaningful (50% to 70%, lower half of the range) recovery in the event of a payment default.
We also affirmed our issue-level rating on the company's $150 million senior paid-in-kind (PIK) toggle notes maturing in March 2018 at 'CCC+'. The recovery ratings remain '6', indicating our expectations for negligible (0% to 10%) recovery in the event of a payment default.
Adjusted debt for the 12 months ended July 2, 2016, was $764 million.
"The affirmation reflects our view that leverage will improve closer to 7.0x by fiscal year end 2016 from over 7.5x for the last 12 months ended July 2, 2016," S&P Global Ratings analyst Amanda Cusumano said. "Leverage has increased because of weak revenue performance and higher marketing and legal expenses that have restrained profitability."
The stable outlook reflects our expectation for operating performance to improve beyond fiscal 2016, as new product innovations at higher price points support revenue growth and EBITDA improves from lower legal expenses and higher margin products in 2017. We estimate this will result in debt to EBITDA near 7x in 2016 and 6x in 2017, coming down from elevated levels above 7.5x for the LTM ended July 2, 2016. The stable outlook incorporates our expectation that the company will refinance its $225 million ABL facility ahead of its June 2017 maturity.
We could consider a downgrade if operating performance deteriorates further or financial policies become more aggressive leading to leverage being sustained well over 8x or if we no longer believe the company will be able to refinance its ABL facility before its maturity in June 2017. A deterioration of operating performance could occur from an unfavorable ruling from the Department of Justice investigation, or if the company is not successful with its new higher margin product innovations or experiences continued volume declines in its core portfolio with the inability to take pricing.
We could consider an upgrade if improvements in profitability lead us to expect leverage to be sustained below 5x. However, we expect the company to maintain leverage over 5x, given its financial sponsor ownership and aggressive financial policies. We estimate this could occur if the company improves profitability through lower commodity costs and higher margin products leading to gross profit margins sustained above 24%.