Fitch Ratings has affirmed the following ratings of Del Monte Foods Company and Del Monte Corporation. The Rating Outlook is Stable.
Del Monte Foods Company (Parent)
--Long-term Issuer Default Rating (IDR) at 'BB'.
Del Monte Corporation (Operating Subsidiary)
--Long-term IDR at 'BB';
--Senior secured bank facility at 'BB+';
--Senior subordinated notes at 'BB-'.
At April 27, 2008, Del Monte's debt totaled approximately $1.9 billion. All of Del Monte's debt was issued by Del Monte Corporation, a wholly-owned operating subsidiary, and is guaranteed by Del Monte Foods Company, the parent corporation.
Del Monte's ratings reflect the company's balanced financial strategy, solid cash flow generation, and leading number-one and number-two market positions in many of the categories in which it competes. While acquisition activity has led to periods of higher than normal leverage, Del Monte's prudent use of internally generated cash flow and the application of proceeds from occasional divestitures for debt reduction has enabled it to protect its credit profile.
The ratings and Outlook also incorporate Fitch's expectation that, given continued industry-wide commodity and packaging cost pressures, Del Monte's margins will remain under pressure. Also considered is the company's plan to increase advertising and marketing spend in order to support key brand equities and enhance its ability to take pricing. However, additional pricing actions, new product volume and productivity related savings are not anticipated to fully offset these incremental costs in the near term.
On June 29, 2008, Del Monte entered an agreement to sell its seafood business, including StarKist, to Dongwon Enterprises Co., Ltd. for 6-7 times the average of the trailing three-year EBITDA or $363 million, subject to working capital adjustments. The transaction received regulatory approval on Aug. 14, 2008 and is expected to close during the second fiscal quarter of 2009. For further information, see Fitch's May 16, 2008 press release, 'Del Monte's Ratings Unaffected by StarKist Announcement' available on the Fitch Ratings web site at www.fitchratings.com.
Del Monte's credit measures are currently adequate for the rating category. Given the anticipated weakness in operating margins, the company's plan to use the approximate $300 million in net after-tax StarKist proceeds for debt reduction will help strengthen its position within the current rating category.
For the fiscal year ended April 27, 2008, total debt-to-operating earnings before interest taxes depreciation and amortization (EBITDA) was 4.0 times (x), funds from operations (FFO) adjusted leverage was 4.7x, and EBITDA-to-gross interest expense was 3.2x. Del Monte generated $158 million in free cash flow (defined as cash flow from operations less capital expenditures and dividends) of which approximately $111 million or 70% was used for debt reduction.
Del Monte's secured bank facility requires the company to maintain a total debt-to-EBITDA ratio equal to or less than 5.25x through Jan. 25, 2009. The requirement gradually steps down to 3.75x for the period ending May 1, 2011 and thereafter. Del Monte must also maintain a minimum fixed charge coverage ratio of 1.15x. The bank agreement contains a material adverse effect clause. Upon the occurrence of both a change of control and a ratings decline, subordinated noteholders can require Del Monte to redeem the notes after all secured obligations have been satisfied.
Del Monte is a producer, distributor and marketer of branded processed produce, tomato, broth and pet food and snacks in the U.S. retail market. In fiscal 2008, Del Monte generated $3.7 billion in revenue. Consumer Foods and Pet Products represented 62% and 38% of revenue and 42% and 58% of operating income (excluding corporate expenses), respectively. Del Monte's consumer brands include Del Monte, Contadina and College Inn. Del Monte's pet products brands include 9Lives, Meow Mix, Milk-Bone, Kibbles 'n Bits and Meaty Bone.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Carla Norfleet Taylor, CFA, +1-312-368-3195
Judi
M. Rossetti, CFA, CPA, +1-312-368-2077
Wesley E. Moultrie II, CPA,
+1-312-368-3186 (Chicago)
Media Relations:
Cindy Stoller,
+1-212-908-0526 (New York)
