DBRS Confirms AGT’s Issuer Rating at B (high) and Senior Unsecured Notes at BB (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating of AGT Food and Ingredients Inc. (AGT or the Company) at B (high) and its Senior Unsecured Notes rating at BB (low). The trends are Stable, and the Recovery Rating on the Senior Unsecured Notes remains at RR3. DBRS has discontinued its rating on the Senior Secured High-Yield Notes, as the notes were repaid pursuant to the Company’s early redemption in February 2017. The confirmation of the ratings is based on the Company’s reasonably sound operating performance in 2016 and Q1 2017, despite a challenging operating environment (in Q4 2016 and Q1 2017). AGT’s ratings continue to be supported by its market position, diversification (geography, supplier and customer) and favourable industry trends. The ratings also reflect volatility in input costs and global pulse markets, sensitivity to weather and growing conditions, the low-margin and capital-intensive nature of AGT’s core business, competition and risks associated with growth.

DBRS believes that AGT’s earnings profile should remain at a level consistent with the current B (high) Issuer Rating on a through-the-cycle basis, despite near-term industry headwinds. Revenue and earnings growth may be challenged in the near term by current volatility in pulse markets, but it should stabilize as crop seeding intentions and uncertainty around possible trade barriers in key markets are lifted. AGT’s margins should improve over the medium term as the Company continues to grow its food ingredients business and capacity shifts to the higher margin human food. As such, DBRS believes that AGT’s EBITDA will be challenged to grow meaningfully in 2017, but that it should rise toward and over the $130 million level over the medium term.

AGT’s financial profile should remain at a level considered adequate for the current B (high) Issuer Rating on a through-the-cycle basis and could improve over the longer-term based on the expected return to growth in operating income in 2018 and the evolution to positive free cash flow generation. Cash flow from operations should continue to track operating income (excluding unrealized foreign exchange losses), while capex should moderate somewhat but remain in the $30 million per year range. DBRS expects that AGT’s dividend will remain relatively stable on a per-share basis, resulting in improving free cash generating capacity toward the positive level in the near to medium term. Any free cash flow is expected to be used to invest in growth and/or repay debt with a goal of reaching the Company’s stated deleveraging intentions (reduce debt-to-EBITDA below 4.0 times (x) within 12 to 18 months). Over the longer term, DBRS believes free cash flow could be used to support increasing shareholder returns. As such, DBRS expects credit metrics will remain challenged in 2017, but that they should continue to improve on a through-the-cycle basis over the medium term primarily because of earnings growth as well as the repayment of debt.

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 principal methodologies are Rating Companies in the Consumer Products Industry, DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, and DBRS Criteria: Guarantees and Other Forms of Support, which can be found on dbrs.com 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.