TEXT - S&P revises High Liner Foods outlook to positive
Overview -- We are revising our outlook on Lunenburg, N.S.-based High Liner Foods Inc. to positive from stable based on the company's stronger-than-expected operating performance and credit protection measures in 2012. -- We are also affirming our ratings on the company, including our 'B' long-term corporate credit rating. -- The positive outlook on High Liner is based on Standard & Poor's belief that the company will maintain its solid market position in the North American value-added frozen seafood industry, while strengthening its profitability and credit measures over the next year. Rating Action On Dec. 13, 2012, Standard & Poor's Ratings Services revised its outlook on Lunenburg, N.S.-based High Liner Foods Inc. to positive from stable. The revised outlook reflects what we view as High Liner's improved operating performance and credit protection measures, which we expect will continue in 2013. Adjusted debt to EBITDA of 4x for the last 12 months (LTM) ended Sept. 29, 2012, is down from about 5x on a pro forma basis a year ago. In addition, the company completed the integration of Icelandic USA in November 2012, which will positively affect High Liner's operating margin in 2013 because of synergistic savings. Standard & Poor's also affirmed its 'B' long-term corporate credit rating on High Liner, as well as its 'B' issue-level on the company's US$250 million senior secured term loan due 2017. The '4' recovery rating on the debt is unchanged. Rationale The ratings on High Liner reflect Standard & Poor's view of the company's "weak" business risk profile and "aggressive" financial risk profile (as our criteria define the terms). We base our business risk assessment on the company's narrow product portfolio and customer concentration. Partially offsetting these factors, in our view, is the company's solid market position in its niche as the leading supplier of value-added frozen seafood in North America. We base our financial risk assessment on the company's aggressive financial policy, acquisitive nature, and weak, but improving, credit protection measures. We assess the company's management and governance as "satisfactory" as per our criteria. In December 2011, High Liner acquired the U.S. and Asian operations of Reykjavik, Iceland-based Icelandic Group h.f. for US$233 million in a debt-financed transaction. The acquisition represented a very large transaction for High Liner, given the 42% increase in its pro forma revenue for the 12 months ended Oct. 1, 2011. The company's pro forma revenue base has increased materially through acquisitions in the past few years, increasing to C$726 million for the nine months ended Sept. 29, 2012, from C$275 million in 2007. The Icelandic asset purchase meaningfully increased High Liner's scale and market position in value-added frozen seafood in U.S. food service. The company's previous significant acquisitions, Viking Seafoods Inc. in 2010 and FPI Ltd. in 2007, enabled it to become the second-largest, value-added frozen seafood food service company in the U.S. The addition of the Icelandic business made High Liner the U.S. leader in this segment. Management completed the integration of Icelandic in November 2012, well ahead of schedule, which should positively affect the operating margin in 2013 due to cost synergies. In our 2013 base case, we forecast we expect: -- High Liner's revenue to remain largely flat due to stable volume and pricing; -- The EBITDA margin of 9.6% for the nine months ended Sept. 29, 2012, should improve because of integration savings; and -- Free cash flow to remain sufficient to support debt amortization and tuck-in acquisitions. While Standard & Poor's believes High Liner's credit protection measures are weak, they have strengthened in the past year because of higher EBITDA and lower debt, with adjusted debt to EBITDA of 4x for the LTM ended Sept. 29, 2012, down from about 5x pro forma 2011. Funds from operations (FFO) to debt of 14% for the LTM has also shown improvement year-over-year. Credit ratios will likely strengthen in 2013 given management's focus on improving the company's cost structure through integration savings and deleveraging the balance sheet. The ratings do not incorporate flexibility for additional significant debt-financed acquisitions or dividends. Liquidity We believe High Liner will have adequate liquidity in the next 12 months, with sources exceeding uses by more than 1.2x. We expect that net sources would be positive, even with a 15% drop in EBITDA. Standard & Poor's bases its view on the following information and assumptions: -- The company's sources of liquidity include availability under the US$180 million asset-based loan facility due 2016 and positive free cash flow. We believe High Liner will generate sufficient cash flow in 2013 to support capital expenditures and term loan amortization. -- The term loan has modest amortization requirements throughout the loan's life. In addition, the credit agreement includes an excess cash flow sweep (the percent of which depends on the leverage ratio), resulting in expected higher-than-scheduled amortization of the term loan. -- The company will maintain at least a 15% EBITDA cushion on its leverage and interest coverage covenants. Financial covenants include a maximum total leverage ratio of 4.5x (with step-downs) and a minimum interest coverage ratio of 3.5x (with step-ups), with step-downs or step-ups beginning in second-quarter 2013. High Liner complied with its covenants for the third quarter ended Sept. 29, 2012. -- The company has sound relationships with its banks and a generally satisfactory standing in credit markets. Recovery analysis Standard & Poor's rates High Liner's US$250 million senior secured term loan 'B' (the same as the corporate credit rating on the company), with a recovery rating of '4', indicating our expectation of average (30%-50%) recovery in the event of default. Outlook The positive outlook on High Liner is based on Standard & Poor's belief that the company will maintain its solid market position in the North American value-added frozen seafood industry, while strengthening its profitability and credit measures in the next year. We could consider raising the ratings if High Liner is able to strengthen its profitability and adjusted credit metrics on a sustainable basis, including FFO to debt above 15%, debt leverage below 4x, and EBITDA cushion above 15% within its financial covenants. Alternatively, we could revise the outlook back to stable in the event the company's operating performance flattens or if High Liner's adjusted credit ratios or financial flexibility do not show improvement in 2013. Related Criteria And Research -- Methodology and Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Outlook Revised To Positive To From High Liner Foods Inc. Corporate credit rating B/Positive/-- B/Stable/-- Rating Affirmed/Recovery Rating Unchanged Senior secured term loan B Recovery rating 4
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