DBRS Assigns Provisional Rating of B to Alliance Grain Traders

DBRS has today assigned an Issuer Rating of B to Alliance Grain Traders Inc. (AGT or the Company) and a provisional rating of B to the Company’s proposed new Senior Secured High-Yield Notes, both with Stable trends. The Senior Secured High-Yield Notes have a recovery rating of RR4. AGT benefits from its scale and position in the pulse processing and staple food markets, its geographic, customer and supply diversification, and favourable industry trends. The ratings also reflect the capital-intensive and low-margin/commodity nature of the industry and the Company’s exposure to input cost volatility and sensitivity to weather, as well as risks associated with growth.

The Company’s earnings profile has come under significant pressure in recent years due to a series of macroeconomic factors that include very poor global pulse crops in 2010 and the global economic uncertainty and political uncertainty in the Middle East in 2011 and 2012, which conspired to limit the liquidity of customers through that time. Despite such a unique set of circumstances and the resulting decline in utilization rate (50% versus normal levels of 65%), the Company continued to grow organically and through small acquisitions, increasing revenues to $840 million for the last twelve months (LTM) ended Q3 2012, from approximately $760 million in 2011 and $640 million in 2010. EBITDA margins declined significantly through this time period due to poor crop conditions, which required additional processing, combined with low utilization rates in a high-fixed-cost business. As such, EBITDA declined to $30 million for the LTM ended Q3 2012 from $44.5 million in 2011 and $36.6 million in 2010.

In terms of financial profile, AGT has chosen to use debt in recent periods to fund growing working capital and expansionary capex in a poor operating environment, resulting in a deterioration of leverage levels. Cash flow from operations before changes in working capital continued to track operating income while capex has fluctuated, reaching a high of $42 million in the LTM ended Q3 2012 as the Company has invested in new processing facilities (maintenance capex remains very low, in the $5 million to $6 million range). The Company’s policy has been to maintain total dividends paid in the $12 million range. Cash generated from changes in working capital recently shifted to positive but has historically been negative as the Company has focused on growth. The Company chose to fund such expansionary capex and negative working capital with debt. As such, balance-sheet debt increased at a faster rate than equity, resulting in a deterioration of credit metrics. As at Q3 2012, the Company had approximately $265 million of balance-sheet debt, which, combined with EBITDA of $30 million, resulted in debt-to-EBITDA of approximately 8.8 times (x).

Going forward, DBRS believes the Company’s earnings profile will strengthen in the near to medium term as the economic environment stabilizes and crop conditions normalize on a global basis. Revenues should grow to over the $1 billion mark in the near to medium term, based on volume growth in the core business (due to the improved macro environment) and growth in new products (food ingredients) and new geographies. EBITDA margins are expected to recover at a slow and steady pace from recent historic lows, as utilization levels improve in this high-fixed-cost business. As such, DBRS believes EBITDA could recover toward the $60 million level in the near term and toward the $80 million level in the medium term.

In terms of financial profile, the Company is expected to issue approximately $125 million of Senior Secured High-Yield Notes in conjunction with its wholly owned subsidiary Alliance Pulse Processors, Inc. (APP), entering into a new maximum $270 million credit facility (comprising a term loan of $90 million, a revolver of $30 million for capex and investments, and a working capital revolving credit facility of $150 million). The proceeds of the new notes issuance of AGT and the term loan of APP are expected to be used primarily for the repayment of existing indebtedness (though the composition of debt will shift significantly toward long term). As such, credit metrics pro forma the recapitalization are not expected to materially change.

Going forward, cash flow from operations should continue to track operating income, while capex is expected to moderate somewhat as major investments in new facilities have been completed in recent years and the dividend policy is expected to remain consistent. As such, DBRS expects that the Company will improve its generation of free cash flow before changes in working capital going forward, from modestly negative in 2013 to positive in 2014, rising steadily over the medium term. Cash generated from changes in working capital are expected to shift from consistently negative in recent years to neutral or positive going forward. DBRS expects that AGT will use free cash flow generated to invest in growth, rather than to increase returns to shareholders or to repay debt. As such, DBRS believes that AGT has the potential to improve its credit metrics, primarily with growth in EBITDA (i.e., debt-to-EBITDA under 6.0x) in the near to medium term, which could result in a positive rating action.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating the Consumer Products Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.