Rating Action: Moody's downgrades KC Culinarte CFR to B3 from B2; outlook revised to negative
Global Credit Research - 17 Jul 2020
Approximately $369 million of rated first-lien debt instruments affected.
New York, July 17, 2020 -- Moody's Investors Service ("Moody's") has downgraded ratings of KC Culinarte Intermediate, LLC ("Kettle Cuisine"), including the company's Corporate Family Rating (CFR) to B3 from B2, Probability of Default Rating to B3-PD from B2-PD, and first-lien senior secured debt rating to B2 from B1. The outlook is revised to negative from stable.
The rating downgrades reflect sustained high financial leverage, initially related to acquisitions that likely will increase further during 2020 and be sustained at elevated levels for the foreseeable future. This is due mainly to severe incremental negative effects from the coronavirus, including closures and volume reductions at foodservice customers that we anticipate will persist for several quarters. As a result, debt/EBITDA, which had been sustained at over 7.0x before the coronavirus pandemic took hold in March, will likely rise into the teens in fiscal 2020 (ending in September) before improving, and will likely exceed 9.0x in fiscal 2021. Moody's also expects that the company will have negative free cash flow until production volumes regain most of the declines. The company's liquidity has weakened but is currently adequate, supported by the recent draw down of its $60 million revolving credit facility. Current cash balances approximate $50 million.
Cost overruns and operational challenges have hampered the integration of Harry's Fresh Foods that was acquired in April 2019. The integration reached near-completion in early 2020, but will face further challenges due to the coronavirus, which has significantly reduced foodservice sales volumes. Kettle Cuisine's foodservices sales, including direct and distributor sales, represented over 40% of fiscal 2019 total sales.
The following ratings/assessments are affected by today's action:
..Issuer: KC Culinarte Intermediate, LLC
.... Corporate Family Rating, Downgraded to B3 from B2
.... Probability of Default Rating, Downgraded to B3-PD from B2-PD
....Senior Secured 1st Lien Term Loan, Downgraded to B2 (LGD3) from B1 (LGD3)
....Senior Secured 1st Lien Rev Credit Facility, Downgraded to B2 (LGD3) from B1 (LGD3)
..Issuer: KC Culinarte Intermediate, LLC
....Outlook, Changed To Negative From Stable
In addition to the above referenced rated instruments, the company has a $69 million second lien term loan due 2026 that is not rated by Moody's. The B2 ratings assigned to the $369 million of first lien credit facilities are one notch higher than the B3 CFR, reflecting their priority lien on the collateral relative to the $69 million second lien term loan.
Kettle Cuisine's B3 Corporate Family Rating reflects its small scale, high product concentration and high financial leverage, balanced against a fundamentally stable business profile characterized by modest sales growth potential, capacity to generate attractive EBITDA margins in the high teens, and typically good cash flow conversion. Additionally, the company's business profile is supported by favorable long-term consumer demand trends toward fresh, high quality foods and by its long relationships with a diversified core customer base.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility are creating an unprecedented credit shock across a range of sectors and regions. Foodservice sales including sales to restaurants are especially negatively affected by the coronavirus pandemic. Moody's expects that this exposure will be reflected in material declines in KC Culinarte's earnings over the next several quarters. Moody's regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects deterioration in KC Culinarte's credit quality, given the company's high exposure to foodservice and consumer spending that results in high vulnerability to shifts in market demand and sentiment in these unprecedented operating conditions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook reflects uncertainty regarding the timing and pace of recovery of sales volume in foodservice channels-- a likely prerequisite for Kettle Cuisine's return to sustainable operating performance. Moody's expects that the company's third fiscal quarter ended in June will be the most severely impacted by the coronavirus, with sequential improvement thereafter. Moody's anticipates that the company will likely generate negative free cash flow over the next year, but that the cash balance will not fall below $20 million.
Ratings could be downgraded if Kettle Cuisine's operating performance or liquidity deteriorates more than Moody's is anticipating, or if the operating environment does not show clear signs of recovery by the end of calendar 2020. Quantitatively, if the company is not likely to generate positive free cash flow by early 2021 a downgrade could occur. Kettle Cuisine is not likely to be upgraded over the next two years. However, if the company is able to reduce debt/EBITDA below 6.0x and generate sustained positive free cash flow, an upgrade would be possible.
The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Lynn, Massachusetts, Kettle Cuisine is a leading fresh prepared foods company specializing in high quality soups, sauces, and side dishes sold throughout North America. Primarily through acquisitions, Kettle has expanded its offerings to include all natural, high quality sauce foundations, and sous vide entrées. Kettle Cuisine supplies an array of retailers, national restaurant chains, and food service establishments such as independent restaurants and cafés, hotels, banquet halls, convention centers, cruise ships, stadiums, and meal kit companies. KC Culinarte Intermediate, LLC was formed in 2018 through the merger of Kettle Cuisine LLC and Bonewerks Culinarte ("Bonewerks") and is owned by affiliates of Kainos Capital, a private equity investment firm exclusively focused on the food and consumer sector. Fiscal 2019 revenues approximated $365 million.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Brian Weddington, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 John E. Puchalla, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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