Thursday, December 16, 2010

New Rating

Fitch Rates Dean's Proposed $400MM Issuance 'CCC/RR6'
Posted on: Wed, 15 Dec 2010 01:08:50 EST

Symbols: DF
Dec 15, 2010 (Close-Up Media via COMTEX) --

Fitch Ratings has assigned a 'CCC/RR6' rating to Dean Foods Company's (Dean; NYSE
: DF | PowerRating) approximately $400 million proposed senior unsecured notes. The ratings remain on Rating Watch Negative.

Today Dean announced preliminary plans to offer, subject to market and other conditions, up to approximately $400 million of senior notes. The company also entered into an amendment to its bank credit and receivables purchase agreements, dated April 2, 2007 and subsequently amended and restated on June 30. The amendments are conditioned upon the completion of the notes offering and subsequent debt paydown as described below.

Dean intends to use net proceeds from the debt offering to pay down a portion of its outstanding bank term loan A and to pay fees and expenses related to the credit facility amendment mentioned above. At Sept. 30, Dean had $4.1 billion of total debt, of which approximately $1.3 billion was related to its term A loan. Roughly $1.1 billion of this term loan matures on April 2, 2014.

Fitch's 'CCC/RR6' rating is based on expectations that the newly issued notes will rank pari passu with Dean's existing senior unsecured notes. The company's existing $500 million of 7 percent guaranteed notes due June 1, 2016 contain a change of control provision that requires Dean, or any third party involved in a change of control, to repurchase all or any part of the notes at a purchase price of 101 percent plus accrued and unpaid interest.

Furthermore, due to Fitch's recovery analysis, which incorporates a notching methodology relative to the Issuer Default Rating (IDR), the 'CCC/RR6' rating implies limited recovery in a distressed situation. Fitch does not expect Dean to default on these obligations; however, the unsecured note rating reflects the heavy mix of secured debt in the company's capital structure and Fitch's view that limited value would be available for distribution to unsecured bondholders if there were a recovery event.

On Dec. 3, Fitch downgraded Dean's IDR to 'B' from 'B+' due to materially higher than expected declines in operating earnings and cash flow along with Fitch's expectation that financial leverage will remain elevated through 2011. Additionally, Fitch placed all of Dean's ratings on Rating Watch Negative because of heightened covenant risk under the company's secured bank facility's maximum leverage requirement. The amendment to Dean's credit facility provides increased flexibility under its maximum leverage ratio and minimum interest coverage requirements while introducing a new senior secured leverage ratio condition.

From the effective date of the amendment through Dec. 31, 2011, Dean's maximum leverage ratio will be 5.75 times (x), stepping down by 0.25x increments annually at Dec. 31 until Sept. 30, 2013 when the ratio falls to 4.5x. The company's minimum interest coverage ratio is set at 2.5x through Dec. 31, 2011, stepping up to 2.75x at March 31, 2012 and then increasing to 3.0x at March 31, 2013. Dean's new maximum senior secured leverage ratio is 4.25x through Dec. 31, 2011, declining to 3.75x on March 31, 2012 and then to 3.5x on March 31, 2013.

Fitch currently projects that total debt-to-operating EBITDA for Dean will approximate 5.6x at year end 2010 and 5.4x at the end of 2011. Given that the company's bank covenants excludes up to $100 million of unrestricted cash and adjusts for non-cash expenses and non-recurring charges, Fitch expects cushion under Dean's covenants to gradually improve as operating performance stabilizes and the company uses free cash flow along with proceeds from potential asset sales to repay debt.

Negative Rating Watch and Rating Triggers:

Fitch views the amendment to Dean's credit and receivables-backed facilities positively and currently believes the company's liquidity is adequate. At Sept. 30, Dean had $1.5 billion of liquidity which included $102.1 million of cash, $863.1 million of revolver availability and $481.3 million of borrowing capacity under its receivables-backed facility. Of the secured revolver, $225 million expires on April 2, 2012 while $1.3 billion is due April 2, 2014. Once the amendment becomes effective, the maturity date on the company's $600 million receivables-backed facility will be Sept. 30, 2011 versus June 30, 2011 currently.

Dean's ratings will be removed from Negative Watch once the amendment of the company's credit facility becomes effective. As previously mentioned, effectiveness is conditioned upon Dean issuing up to $400 million of the aforementioned rated notes (which must be at least seven years in tenure) on or before Feb. 28, 2011 and using net proceeds to prepay its term A loan as outlined by the agreement.

Fitch currently rates Dean and its wholly-owned subsidiary Dean Holding Company as follows:

Dean Foods Company (Parent)

--Issuer Default Rating (IDR) 'B';

--Bank credit facility 'BB-/RR2';

--Senior unsecured debt 'CCC/RR6'.

Dean Holding Company (Operating Subsidiary)

--IDR 'B';

--Senior unsecured debt 'CCC/RR6'.

This is what it means to be "King of the Mountain."

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