S&P: Flowers Foods Inc.'s $300 Million Unsecured Notes Rated 'BBB'
Flowers has indicated it will use net proceeds to primarily repay upcoming maturities on its existing senior unsecured term loans. Any additional proceeds will be used to repay outstanding revolver borrowings of $32.5 million and $190 million outstanding on the accounts receivable (AR) securitization facility. We view this issuance favorably as it improves the company's maturity schedule, and could increase external liquidity sources on the revolving and AR securitization facilities and reduces the company's variable rate debt ahead of potential rate increases by the Federal Reserve.
As of July 16, 2016, Flowers has roughly $1.5 billion of adjusted debt. We expect debt to EBITDA to be maintained in 2x-3x range through 2017.
All of our other ratings on the company, including the 'BBB' corporate credit ratings, are unchanged by the transaction. The outlook is stable.
Our ratings on Flowers reflect its participation in the competitive packaged bread and snack cake category. Flowers has leading market positions in core markets from its well-recognized brands, such as Nature's Own, Wonder, Tastykake, Home Pride, and newly acquired organic brands Dave's Killer Bread and Alpine Valley. These new brands gave the company further geographic reach in the West Coast. The company operates solely in the U. S., with some Canadian distribution capabilities. The company's product focus is narrow as it predominantly produces bread, buns, rolls, and snack cakes. The company's margins are lower than those of packaged food peers because approximately 85% of revenues are generated through the direct-store-delivery distribution model, which is generally more costly than the direct-to-warehouse model. We expect margins in the 12.5%-13.5% range through 2017, as the company incurs higher marketing and legal expenses. The company is currently under review by the U. S. Department of Labor regarding its independent distributor network being a potential violation of the Fair Labor Standards Act. In addition, shareholder lawsuits have been filed in an effort to recover damages from Flowers. These ongoing legal risks could harm the company's cost structure and, in turn, influence the rating if we expect EBITDA margins to be below 10%, or if we expect the company's reputation to be at risk whereby it faces increased competitive pressures.