DBRS Confirms Ratings of AGT after Closing of Transaction with Fairfax Financial

DBRS Limited (DBRS) confirmed the Issuer Rating of AGT Food and Ingredients Inc. (AGT or the Company) at B (high) and its Senior Unsecured Notes (the Notes) rating at BB (low), both with Stable trends. The Recovery Rating on the Notes remains RR3. The rating actions follow the Company’s announcement that it has closed its previously announced transaction with Fairfax Financial Holdings Limited, through certain subsidiaries (collectively, with Fairfax Financial Holdings Limited, Fairfax), through which Fairfax has invested $190 million in AGT in exchange for the issuance by AGT of 5.375% interest-bearing securities (the Preferred Securities) and common share purchase warrants.

The Preferred Securities are unsecured obligations that will mature in 99 years and will be guaranteed by certain of AGT’s subsidiaries. The warrants are exercisable within seven years into one common share each in the capital of AGT at a price of $33.25 per share and, if exercised, would effectively convert the Preferred Securities into common shares. AGT can also elect to require early exercise of the warrants if, after the fifth anniversary, the five-day volume weighted-average closing price of its common shares reaches $53.20.

DBRS views the Preferred Securities as 100% debt for the purpose of calculating credit metrics because they do not meet the criteria for equity treatment established in “DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers,” which includes the requirement that any hybrid instrument be subordinated in right of payment and security to all other debt classes for equity consideration. The Preferred Securities are unsecured obligations ranking pari passu with the Company’s outstanding Notes in the case of any Terminal Event (i.e., bankruptcy filing, wind-up or liquidation). That said, AGT, at its sole discretion, can elect to defer interest payments on the Preferred Securities for an indefinite period.

Despite the treatment of the Preferred Securities as debt by DBRS, the confirmation of the Issuer Rating is based on the Company’s use of proceeds in the near term for the repayment of amounts drawn on the credit facility of Alliance Pulse Processors Inc. (APP; the Company’s North American subsidiary) as well as for certain investments in growth. As such, the transaction does not result in any material near-term changes to the Company’s credit metrics. DBRS does, however, recognize the benefits provided by the transaction to the Company’s liquidity in the near term. In addition, over the longer term, AGT’s credit risk profile will benefit materially if the warrants are exercised, which would effectively result in the conversion of the Preferred Securities into common shares.

DBRS expects credit metrics to remain challenged through the end of 2017 because of the difficult operating environment; however, metrics should improve on a through-the-cycle basis thereafter, while the enhanced liquidity offered by the Preferred Securities will benefit the Company in the current challenging operating environment. Going forward, DBRS believes that any free cash flow will likely be directed toward investments in growth rather than in further repayment of debt and/or increasing shareholder returns.

The Recovery Rating on the Notes remains RR3 despite the existence of a cross-default in the Preferred Securities whereby the Preferred Securities would default upon any default on the Notes, along with their equal ranking as an unsecured obligation of AGT. DBRS also considered the likelihood of increased indebtedness through the use of APP’s secured credit facility and the priority guarantee provided to the Notes from certain AGT subsidiaries, including Arbel Group in Turkey. Based on the terms of the Preferred Securities, the priority guarantors of the Notes will not be providing a guarantee on the Preferred Securities so long as such Notes are outstanding, thereby providing a prior ranking claim on the assets of the priority guarantors vis-à-vis the Preferred Securities. As a result, DBRS concluded that, despite the wide divergence in possible scenarios, recovery on the Notes would remain unchanged in the 60% to 80% range, based primarily on the assets of Arbel Group (inventory, receivables and fixed assets). As a result, in accordance with “DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers,” the Recovery Rating on AGT’s Notes remains RR3 and the rating on the Notes remains BB (low).

DBRS notes that there have not been any material changes to AGT’s credit quality since its last review published on May 23, 2017. AGT’s ratings continue to be supported by its market position; diversification (geographic regions, suppliers and customers); 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.

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, DBRS Criteria: Guarantees and Other Forms of Support and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, 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.

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