DBRS Confirms Ratings of Alliance Grain Traders Inc. at B, Stable

DBRS has today confirmed the Issuer Rating and Senior Secured High-Yield Notes rating of Alliance Grain Traders Inc. (AGT or the Company) at B, with Stable trends. The Senior Secured High-Yield Notes continue to have a recovery rating of RR4. AGT’s ratings continue to 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 ratings also reflect benefits from its scale and position in the pulse processing and staple food markets, its geographic, customer and supply diversification, and favourable industry trends.

AGT’s earnings recovered meaningfully, and its earnings profile strengthened within the current rating category toward the end of 2012 and through Q3 2013, benefitting from the normalization of supply disruptions, easing macroeconomic headwinds and other factors that had been negatively affecting the sector since 2010. Revenues increased above the $1 billion level in the last 12 months (LTM) ended Q3 2013, while EBITDA margins recovered somewhat based primarily on improving utilization of processing faclities, but remain below historical norms. As such, EBITDA increased to approximately $50 million in the LTM ended Q3 2013 versus $34 million in 2012.

AGT’s financial profile remained relatively stable and within the range considered acceptable for the current rating category through Q3 2013. Cash flow from operations remained relatively flat versus the previous year, while capex increased moderately as the Company continued to invest in new production facilities. Total dividends paid was approximately $12 million in the LTM ended Q3 2013, resulting in negative free cash flow before changes in working capital.

The Company used incremental debt to fund negative free cash flow as well as working capital requirements. Therefore, as at Q3 2013, balance-sheet debt increased to approximately $342.5 million versus approximately $265 million in Q3 2012. Despite this increase in debt credit metrics improved as a result of increasing EBITDA (i.e., debt-to-EBITDA of 6.83 times (x) and EBIT coverage of 1.51x for the LTM ended Q3 2013 versus approximately 8.8x and 1.11x, respectively at Q3 2012). DBRS also notes the Company’s net positive working capital position, as approximately $120 million of balance-sheet debt is short term in nature, versus approximately $145.8 million in accounts receivable and $204.2 million of readily marketable inventory. As such, it is important to consider leverage trends as calculated using long-term debt-to-EBITDA, which ended Q3 2013 at approximately 4.31x versus approximately 7.1x immediately subsequent to the Company’s issuance of Senior Secured High-Yield Notes in February 2013.

Going forward, DBRS believes that AGT’s earnings profile will continue to strengthen over the medium term as the macroeconomic environment stabilizes, supply and demand normalize and the Company enhances its product diversfication. Specifically, the Company will continue to invest in its typically higher margin and more stable food ingredients segment. Revenues are expected to remain relatively stable in the $1 billion to $1.2 billion range in the near term. EBITDA margins are expected to improve as utilization improves and product mix shifts toward higher margin value-added pulses and food ingredients. Margins could also benefit over the medium term as the Company seeks to improve efficiency through added automation and improved storage and transportation. As such, EBITDA should increase above $50 million and toward the $75 million level in the medium term.

In terms of financial profile, DBRS expects AGT will continue to improve over the medium term based primarily on growth in earnings and relatively stable debt levels as well as positive trending cash flow generation. Cash flow from operations should track operating income and improve toward the $45 million level in the medium term. Despite the Company’s recent announcement that it will complete the expansion of a second line at its pulses ingredient production facility in Minot, North Dakota, capex is expected to decline toward the $20 million to $25 million range, as major investments in new processing facilities have largely been completed. Dividend policy is not expected to change, which should result in total dividends paid in the $12 million per year range. As such, DBRS expects free cash flow before changes in working capital to rise toward the $20 million level in the medium term. Despite its seasonal nature, cash generated from changes in working capital should shift toward neutral or positive on an ongoing basis. DBRS expects that AGT will use free cash flow generated to invest in growth rather than to increase returns to shareholders or repay debt. As such, DBRS believes that AGT has the potential to improve credit metrics with growth in EBITDA (i.e., debt-to-EBITDA below 6.0x, long-term debt-to-EBITDA toward 3.75x and EBIT coverage toward 2.0x) in the near to medium term, which if sustainable, 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 DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers and Rating Companies in the Consumer Products Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.