DBRS Confirms AGT Food & Ingredients Inc. and Changes Trend to Positive

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Secured High-Yield Notes rating of AGT Food & Ingredients Inc. (AGT or the Company) at B and changed the trends to Positive from Stable. The Recovery Rating on the Senior Secured High-Yield Notes remains at RR4. The trend change reflects the Company’s improving earnings profile since the inception of the rating in 2013 driven by a recovery in the Company’s legacy pulse processing segment and solid growth of its new higher margin, less cyclical food ingredients and packaged foods segment. In addition, the Company completed a bought deal for $80 million of common shares in November 2014 the net proceeds of which were and are to be used to invest in growth, repay debt and fund working capital.

DBRS believes the Company’s earnings profile will continue to improve over the medium term as AGT focuses its growth in the less cyclical, higher margin food ingredients and packaged foods segment. Top-line growth should benefit from the Company’s recent agreement with Ingredion Incorporated in June 2014 for the distribution of its pulse flours, protein and fiber ingredients to the United States, Canada, China, Europe, the Middle East and North Africa. EBITDA margins should continue to rise over the medium term as capacity utilization rises and the product mix shifts toward the higher margin value added food ingredients and packaged foods segment. As such, DBRS believes EBITDA should continue to increase closer to the $100 million level over the medium term.

DBRS expects AGT’s financial profile should continue to improve over the medium term benefiting from relatively stable long-term balance-sheet debt, positive trending cash flow generation and the Company’s recent equity issuance. Cash flow from operations should continue to track operating income while capital expenditures could increase modestly to further invest in growth in the food ingredients segment. The Company’s dividend policy is expected to remain consistent with recent practice. DBRS believes that AGT will use free cash flow generated as well as the proceeds of its recent equity issuance to invest in growth rather than to increase returns to shareholders or repay debt. Should AGT continue to display solid growth in its food ingredients and packaged foods segment and maintain its improved credit metrics (i.e., debt-to-EBITDA below 6.0 times (x), long-term debt-to-EBITDA below 3.75x and EBITDA coverage above 2.5x) in the near term, an upgrade of AGT’s ratings to the B (high) rating category would likely result.

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 Companies in the Consumer Products Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

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