Morningstar DBRS Assigns Issuer Rating of BB (high) and Provisional Credit Rating of (P) BB to the Senior Unsecured Notes of Sollio Cooperative Group, Both With Stable Trends

DBRS Limited (Morningstar DBRS) assigned an Issuer Rating of BB (high) to Sollio Cooperative Group (Sollio or the Company) and a provisional credit rating of (P) BB to the Company's Senior Unsecured Notes, both with Stable trends. The provisional Senior Unsecured Notes rating is based on a recovery rating of RR5.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings are supported by Sollio's established brands, market position, and distribution network as well as by the business risk benefits associated with the Company's cooperative structure and the high barriers to entry in the agri-food business. That said, the credit ratings also take into consideration Sollio's relative geographic concentration, competitive market environment, exposure to economic cycles (particularly in the home improvement segment), volatility in the Olymel business segment, and the idiosyncrasies associated with the Company's financials, due to its cooperative structure. The Stable trends are based on Morningstar DBRS' expectation that the Company will remain prudent with its capital allocation priorities and maintain key credit metrics that, in aggregate, are acceptable within the current rating category on a sustainable basis (i.e., debt-to-EBITDA remains below 4.5 times (x) and EBITDA-interest coverage remains above 3.5x). For these key credit metrics, Morningstar DBRS' debt calculation includes the Company's lease liabilities, accounts receivable securitization, a portion of outstanding preferred shares, and all subsidiary debt.

Sollio is proposing to issue up to $200 million of senior unsecured notes (the Proposed Notes). The Company is expected to use the proceeds towards the repurchase of preferred shares. Given the staggered repayment periods, excess proceeds in the interim may go towards temporary revolver repayments. The remainder of proceeds is expected to be used for transaction fees and expenses. The Proposed Notes will be senior unsecured obligations and will rank equally and pari passu with other present and future unsecured obligations and senior in right of payment to all existing and future subordinated obligations. The Proposed Notes will be initially fully and unconditionally guaranteed solidarily (jointly and severally), on a senior unsecured basis, by the existing and future subsidiaries that, subject to specified exemptions, are borrowers under or provide guarantees with respect to Sollio's Revolving Credit Facility, for so long as guarantees are in place thereunder. The Proposed Notes and the guarantees will be effectively subordinated to all future secured obligations, to the extent of the value of the assets securing such obligations. The Proposed Notes will be structurally subordinated to all existing and future obligations, including indebtedness and trade payables, of any of Sollio's subsidiaries that do not guarantee the Proposed Notes.

CREDIT RATING DRIVERS
Should the Company materially improve its business risk profile through increased size and diversification while credit metrics are sustained at levels acceptable for the higher credit rating category (i.e., debt-to-EBITDA comfortably below 3.50x), Morningstar DBRS could take a positive credit rating action. Conversely, should operating performance deteriorate and/or the Company implement more aggressive financial management practices such that credit metrics weaken to levels no longer appropriate for the current credit ratings (i.e., debt-to-EBITDA above 4.50x), Morningstar DBRS would likely take negative rating action.

EARNINGS OUTLOOK
Morningstar DBRS expects Sollio's earnings profile to remain relatively stable during the forecast period and commensurate with the current rating category. Morningstar DBRS anticipates revenues to increase in the low-single digits, increasing towards $8.0 billion in F2025 and above $8.1 billion in F2026 from $7.8 billion in F2024. The revenue growth forecast assumes steady growth in the food and agriculture segments while BMR retail sales are expected to be relatively flat in the near term as consumer spending trends in the home improvement sector remain subdued. In the absence of any material trade actions or tariff policy shifts, Morningstar DBRS expects the Company to be able to maintain EBITDA margins at the current improved levels and to be relatively resilient compared with the post-pandemic volatility. Morningstar DBRS expects margin stability to be driven by an increased proportion of higher-margin value-added products and efficiency improvements, partially offset by near-term input cost pressures. As a result, Morningstar DBRS expects EBITDA to grow toward $520 million by F2026 from $497 million in F2024.

FINANCIAL OUTLOOK
In terms of financial profile, Morningstar DBRS expects leverage will increase during F2025 and F2026 to support the Company's growth capital investments but remain acceptable for the current rating category. Morningstar DBRS expects Sollio's financial profile to be supported by the Company's solid cash flow-generating capacity, which is more than sufficient to cover its capital expenditure (capex) plans and mandatory debt repayments. Cash flow from operations (including distributions from joint ventures and before any patronage refunds) are forecast at around $350 million in F2025 and F2026, relatively flat compared with $361 million in F2024. Capex is expected to remain elevated in the $135 million to $150 million range during F2025 and F2026, similar to F2024 levels, as Sollio continues to invest in its distribution networks and technology improvements. Morningstar DBRS expects the Company will continue to distribute the patronage refund at the end of the year to qualifying dealers in the form of cash or common shares. Morningstar DBRS expects the Company will use the free cash flows (before any working capital changes) of $170 million and $190 million in F2025 and F2026, respectively, combined with additional debt, toward capital projects for process optimization as well as preferred share redemptions. As such, and with the additional debt issuance, debt-to-EBITDA is expected to increase toward 3.8x in F2025 and 4.1x in F2026 compared with 3.3x in F2024, remaining acceptable for the current rating category.

CREDIT RATING RATIONALE
Over the last five years Sollio's earnings have experienced some volatility as operating performance was significantly affected by several events during and following the coronavirus pandemic. Sollio's revenue increased materially at the beginning of the pandemic to $8.4 billion in the fiscal year ended October 31, 2022 (F2022), from $7.6 billion in F2020, primarily driven by higher commodity prices and increased demand for home improvement products. Since then, revenue has reverted to $7.8 billion, primarily as a result of the normalization of both commodity prices and consumer home improvement spending, as well as some strategic divestitures, including the Company's Giannone partnership and its direct grain merchandising operations. Sollio's EBITDA margins were materially affected in F2021 and F2022, resulting in a decline in EBITDA (adjusted for operating leases and including the cash distributions from equity investments) to $129 million in F2022 from $441 million in F2020. This decline was primarily due to headwinds related to bans on exports to China; labour disruptions and shortages that affected the Company's slaughtering operations, resulting in outsourcing and increased feed costs as hogs stayed longer on farms; and elevated grain prices that affected hog production margins. Morningstar DBRS notes that Sollio has taken steps to improve its operating efficiency and reduce future volatility in earnings. These actions include reducing the Company's reliance on sales to China and its exposure to unpredictable trade restrictions, increasing the proportion of higher-margin chicken and value-added pork products, and reducing its reliance on foreign labour through asset consolidation and supporting permanent residency status for select foreign workers. The effects of these strategic initiatives, coupled with normalization in commodity pricing and gross margins, resulted in EBITDA recovering to $497 million in F2024.

Comprehensive Business Risk Assessment (CBRA): Sollio's CBRA of BBH is supported by the Company's established brands, market position, and distribution network as well as by the business risk benefits associated with the Company's cooperative structure and the high barriers to entry in the agri-food business. The CBRA also takes into consideration Sollio's relative geographic concentration, competitive market environment, exposure to economic cycles (particularly in the home improvement segment), and volatility in the Olymel business segment

Comprehensive Financial Risk Assessment (CFRA): Sollio's CFRA of BBH reflects Morningstar DBRS' expectation that the Company will prudently manage capital allocation priorities, particularly in the case of any earnings volatility, to maintain key credit metrics at levels that are acceptable for the current rating category.

Intrinsic Assessment (IA): The IA of BBH is within the Intrinsic Assessment range and is based on the CBRA and CFRA, also taking into consideration peer comparisons, among other factors.

Additional Considerations: The credit ratings include no further negative or positive adjustments from additional considerations.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025) at https://dbrs.morningstar.com/research/454196

Further details on the Issuer's Intrinsic Assessment can be found at https://dbrs.morningstar.com/research/456599.

Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodologies:
-- Global Methodology for Rating Companies in Services Industries (February 3, 2025), https://dbrs.morningstar.com/research/447184

-- Global Methodology for Rating Companies in Manufacturing and Production Industries (February 3, 2025), https://dbrs.morningstar.com/research/447185

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (February 3, 2025; https://dbrs.morningstar.com/research/447186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Global Corporate Criteria (February 3, 2025), https://dbrs.morningstar.com/research/447186

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (May 16, 2025), https://dbrs.morningstar.com/research/454196

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 under Related Documents or by contacting us at info-DBRS@morningstar.com.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of the final credit ratings on the above-mentioned securities are subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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