DBRS Confirms AGT Issuer Rating at B (high) and Assigns Provisional Rating of BB (low) to New Senior Unsecured Notes

DBRS Limited (DBRS) has today confirmed the Issuer Rating of AGT Food & Ingredients Inc. (AGT or the Company) at B (high) and assigned a provisional rating of BB (low) to the Company’s proposed issuance of $175 million of Senior Unsecured Notes, with a recovery rating of RR3. Proceeds from the proposed issuance of new Senior Unsecured Notes are expected to be used to fully redeem all of the Company’s outstanding Senior Secured High-Yield Notes (on or around February 14, 2017, the earliest time at which they can be redeemed at par) as well as to repay amounts drawn on the Company’s credit facilities (held at Alliance Pulse Processors Inc. (APP) with a first-lien on APP assets). The RR3 Recovery Rating on the Senior Unsecured Notes assumes the full repayment of the outstanding Senior Secured High-Yield Notes, at which time, upon the closing of the redemption in early 2017 of the Senior Secured High-Yield Notes, the associated rating will be discontinued-repaid.

AGT’s Issuer Rating continues to be supported by its market position in global pulses, diversification (geography, supplier and customers) and favourable industry trends. The rating also reflects volatility in input costs, sensitivity to weather and growing conditions, the low-margin and capital-intensive nature of AGT’s core business, competition and risks associated with the Company’s growth.

The confirmation of the Issuer Rating is based on the Company’s solid operating performance to September 30, 2016, which continued to display meaningful growth in revenues and improved margins, benefitting from the vertical integration capabilities provided by recent acquisitions in the Company’s core business as well as continued progress in food ingredients. EBITDA continued to grow at a steady pace, rising to $109 million for the last 12 months (LTM) ended September 30, 2016, versus $94 million in 2015 and $80 million in 2014. AGT’s financial profile remained relatively stable in the LTM ended September 30, 2016, as improved operating income and cash flow largely offset further increases in balance-sheet debt (long-term debt of $366.2 million at the end of September 30, 2016 versus $344.3 million at the end of 2015 and $276.2 million at September 30, 2015), helping to maintain credit metrics within a range considered acceptable for the current B (high) Issuer Rating (i.e., total debt-to-EBITDA of 4.68 times (x), long-term debt-to-EBITDA of 3.35x and EBITDA coverage of 3.35x, respectively, for the LTM ended September 30, 2016).

Going forward, DBRS believes that AGT’s earnings profile should remain well placed for the current B (high) Issuer Rating on a through-the-cycle basis and could improve over the near to medium term if AGT continues to leverage its vertical integration in the core business and gains further traction growing its food ingredients, including a greater proportion of higher-margin human food (from pet food). AGT’s financial profile should remain at least stable in the near to medium term, as free cash generating capacity is expected to increase and turn positive, driven by rising operating income and cash flow combined with declining expansionary capex and a stable dividend. DBRS believes that AGT will continue to invest in growth and therefore expects that future improvement in credit metrics will be driven primarily by growth in operating income and cash flow rather than debt repayment. Should AGT be successful at improving its business mix by continuing to grow the higher-margin and more stable business segment, as well as its free cash flow and credit metrics (i.e., debt-to-EBITDA below 4.0x and long-term debt-to-EBITDA below 3.0x), a positive rating action could result.

The provisional Recovery Rating on the proposed Senior Unsecured Notes is RR3, representing expected recovery in the 60% to 80% range. DBRS believes that recovery on the proposed Senior Unsecured Notes will continue to be based primarily on the assets in Turkey of the Arbel Group (inventory, receivables and property). The Recovery Rating on the proposed Senior Unsecured Notes also benefits contractually from subordination agreements, which (1) provide contractually senior-ranking guarantees from the Arbel Group, AGT Foods South Africa Ltd. and Alliance Grain Traders (Switzerland) SA; and (2) contractually subordinates the claims of a substantial portion of the intercompany payables owed by the Arbel Group to AGT (and Alliance Grain Traders (Switzerland) SA and from APP to AGT) versus the claims of unsecured noteholders.

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 Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.