Bumble Bee Holdings Inc. Downgraded To #CCC# On Heightened Refinancing Risk And DOJ Ruling O Outlook Negative

Stocks and Financial Services Press Releases Wednesday March 8, 2017 09:58
NEW YORK--8 Mar--S&P Global Ratings

NEW YORK (S&P Global Ratings) March 7, 2017--S&P Global Ratings said today that it lowered its corporate credit rating on San Diego-based Bumble Bee Holdings Inc. to 'CCC' from 'B-'. The outlook is negative. At the same time, we lowered our issue-level rating on the company's $605 million senior secured notes maturing in December 2017 to 'CCC' from 'B-'.

The recovery rating remains '3', indicating our expectations for meaningful (50% to 70%; rounded estimate: 50%) recovery in the event of a payment default. We also lowered our issue-level rating on the company's $150 million senior PIK toggle notes maturing in March 2018 to 'CC' from 'CCC'. The recovery rating remains '6', indicating our expectations for negligible (0% to 10%; rounded estimate: 0%) recovery in the event of a payment default. We removed all the ratings from CreditWatch, where we placed them with negative implications on Nov. 15, 2016. The downgrade reflects our view that the three large near-term debt maturities increase the probability of a default due to heightened refinancing risk over the next 12 months.

The company has been unable to extend the June 2017 maturity of its $225 million ABL because of lender concerns over an outstanding DOJ ruling regarding alleged price collusion in the packaged seafood industry and the company's ability to refinance its bonds. The size and timing of a potential DOJ ruling is unknown, including the timing of a potential settlement schedule. In addition, the company's 9% senior secured notes and 9.625% PIK toggles notes are set to mature in December 2017 and March 2018, respectively.

The company has received an amendment from its lenders removing the debt acceleration restriction if the company were to make a settlement payment of over $15 million, which we believe is likely. While this alleviates our prior concerns over potential debt acceleration over the very near term, the unwillingness of lenders to extend the ABL maturity at this time signals a risk that an extension may not be completed before maturity, especially if the DOJ ruling uncertainty remains. The new amendment also waives an event of default that would have occurred due to the auditors imposing a "going concern" qualification in the company's 2016 audit arising from the upcoming maturities.

The lenders are compensated for the amendment by a 100 basis point increase in pricing on ABL borrowings and imposing restrictions on borrowings or events of default if the company does not maintain certain excess availability thresholds. The amendment allows for the administrative agent to impose a reserve against the company's borrowing base at any time that excess availability under the facility is less than the unpaid amount under a DOJ settlement (when disclosed).

If the company does not maintain certain excess availability thresholds and makes a payment toward the settlement, it will constitute an event of default under the amended ABL agreement. This will ultimately limit the borrowing ability of the company once a settlement amount is disclosed, if the company enters into a settlement with the DOJ. Leverage for the 12 months ended Oct. 1, 2016, rose to above 9x because we include the company's $22.5 million contingent legal expense and ongoing legal expenses related to the DOJ in our EBITDA calculation. In addition, Bumble Bee's revenues declined 5% in the third quarter of 2016. Revenues have been hurt by the devaluation of the Canadian dollar versus the U.S. dollar, pressure on pricing for key products such as albacore, and lower volumes from continued softness in the shelf-stable seafood category.

Nevertheless, sales decline has been lower than overall industry declines, which we attribute to Bumble Bee's brand strength and product innovations (including introducing new packaging, such as pouches instead of cans). Although we expect the company's growth prospects will be challenged as it operates in a mature industry that is not resonating well with consumers--specifically millennials--we believe operating performance and cash flow will improve as legal expenses decline while the top line benefits modestly from recent innovations and channel expansion into food service (following the Anova acquisition in 2013).

Our business risk assessment reflects the company's narrow focus, with more than 90% of its total sales in the shelf-stable seafood category (50% in tuna) and limited organic growth opportunities. The company is the category leader with well-recognized brands, particularly Bumble Bee in the U.S. and Cloverleaf in Canada. However, the company's geographic diversification is limited to North America. The company sources seafood from all major oceans globally and processes about 60% of its own seafood in six operating facilities.

Accordingly, the company is susceptible to fluctuations in commodity costs, primarily tuna, skipjack, aluminum, and fuel, which have pressured profitability in previous years. However, despite our expectations for improvements in the U.S. economy, we believe consumers are still price-sensitive, which will constrain the company's ability to offset rises in commodity costs through price increases. Bumble Bee has increased prices to offset higher commodity costs in the past, but done so to the detriment of volumes, which led to lower sales. From a customer standpoint, the company is not concentrated and sells products through a variety of channels, including supermarkets, mass merchant, warehouse clubs, drug and convenience stores, and independents. The company is also sensitive to negative changes in environmental or fishing regulations, as well as changes in import tariffs in North America.

We assess Bumble Bee's liquidity as weak, reflecting our view that liquidity sources do not cover liquidity uses in the next 12 months. The company's $225 million ABL credit facility ($90.2 million outstanding as of Dec. 31, 2016, is considered a use of liquidity) matures in June 2017 and any availability under it is not included as a source of liquidity over the next 12 months. In addition, the company's $485 million of outstanding senior notes are current as they mature in December 2017 and the $133 million PIK toggle notes outstanding will become current on March 15, 2017.

The potential DOJ settlement amount is still unknown and can be a future use of liquidity. However, we expect the potential settlement will be paid over time, not in one lump sum, which should allow the company some flexibility to manage cash outflows. Principal liquidity sources: Cash funds from operations (FFO) of at least $20 million.Principal liquidity uses: $90.2 million of ABL borrowings outstanding as of Dec. 31, 2016, due in June 2017. (As of Dec. 31, 2016, the company had roughly $196 million of borrowing base availability on its $225 million ABL, leaving roughly $105.8 million available.); $485 million debt maturity of 9% senior secured notes;$133 million debt maturity of 9.625% senior PIK toggle notes;Seasonal working capital uses of $25 million as the company builds inventory before Lent (a period in which seafood consumption rises in the U.S.); and Maintenance capital expenditures (capex) of $4 million.

The negative outlook reflects our view that Bumble Bee could default over the next few months if the company is unable to fully refinance--at reasonable terms--its capital structure ahead of the ABL maturity on June 15, 2017. If the company is considering a debt restructuring that does not appear to make lenders whole as per the original terms, we could take an intermediate step and lower the ratings further. We could revise the outlook to stable or upgrade the company if it refinances its entire capital structure before June 15, 2017, thereby mitigating its near-term maturity and liquidity risk. Our simulated default scenario contemplates a default within the next 12 months because the company is unable to refinance its upcoming ABL and note maturities, resulting in insufficient liquidity to meet any potential legal settlement obligations and fixed-charges. Once additional information on the DOJ case becomes available, we will evaluate its impact on recovery, if any.

Given the company's weak liquidity, we believe the company would have to seek external sources, most likely its ABL, to fund any sizable settlements, which could affect our borrowing base availability and draw assumptions. Year of default: 2018EBITDA at emergence: $72.6 millionImplied enterprise value multiple: 6xThe default EBITDA of $72.6 million roughly reflects fixed charge requirements of about $62.7 million in interest costs (assumes higher rate because of default and includes prepetition interest) and $9.9 million in minimal capex assumed at default. We estimate a gross valuation of $435.6 million assuming a 6x EBITDA multiple within the range we used for some of the company's peers.


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