Fitch Rates Flowers Foods' Sr. Unsecured Term Loan 'BBB'

CHICAGO--()--Fitch Ratings has assigned a 'BBB' rating to Flowers Foods' (FLO) new $150 million five-year senior unsecured term loan. The term loan ranks pari passu with existing unsecured debt and matures April 19, 2021. A full list of ratings is provided at the end of this release.

Net proceeds will be used to repay outstanding debt under Flowers' revolving credit facility and will not affect leverage. Pricing is leverage-based and ranges from LIBOR plus 0.75% to LIBOR plus 2.25%. The term loan amortizes quarterly at a rate of 2.5% of original principal for the first three years, 6.25% for the fourth year, and then 11.25% until maturity.

KEY RATING DRIVERS

Leading Position in Consolidating Industry: Flowers' ratings reflect its leading position as the second largest producer of baked goods in the U.S., with annual revenue of $3.8 billion and a strong portfolio of brands that include Nature's Own, Wonder, Tastykake, and Mrs. Freshley's. The company has steadily increased its market share in a mature and consolidating industry. Organic revenue has grown in the low-single-digit range in most years, increasing 1.2% in 2015, and has been complemented by acquisitions, most recently the purchase of organic bread companies Alpine Valley and Dave's Killer Bread during 2015.

Modest Deleveraging Anticipated: Flowers's leverage increased during 2015 due to the above-mentioned acquisitions. Total debt/EBITDA increased to 2.2x for the year ended Jan. 2, 2016, from 1.7x in the prior year period, and total adjusted debt/EBITDAR rose to 3.2x from 2.7x. Flowers' recently announced $120 million accelerated share repurchase program allows it to return cash to shareholders but the company has also committed to reducing debt as it has done following acquisitions. Fitch projects that free cash flow (FCF) will exceed $100 million annually and that leverage will return to pre-acquisition levels by the end of 2017.

Expanded Footprint, Increased Efficiency: Acquisitions over the past several years have enhanced Flowers' geographic footprint, which now reaches approximately 85% of the U.S. population versus just over 50% five years ago. EBITDA margins are expected to expand from 11.9% at the end of fiscal 2015 closer to management's long-term goal of 12% to 14% through increased operating efficiencies and cost reductions.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for Flowers include:

--Organic sales growth in the low-single-digit range annually;

--EBITDA margin expands approximately 25 to 50 basis points in 2016 and 2017;

--FCF of at least $100 million annually;

--Total adjusted debt/EBITDAR returns to the mid-2.0x range over the intermediate term.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--If Flowers demonstrates a commitment to maintain leverage (total adjusted debt-to-operating EBITDAR) in the low 2x range while generating material free cash flow. Fitch believes this is unlikely in the near- to intermediate-term due to the company's bolt-on acquisition strategy, which periodically increases leverage.

Future developments that may, individually or collectively, lead to a negative rating action include:

--A prolonged and significant drop in earnings and FCF, potentially due to a secular shift away from bakery products, a sizeable acquisition or series of acquisitions or change in financial strategy that results in total adjusted debt/EBITDAR remaining in the low-3x range or higher for an extended period.

LIQUIDITY

Flowers' liquidity remains adequate. Liquidity is supported by internally generated cash flow and availability under a $500 million revolver which matures in April 2020 and a $200 million accounts receivable (A/R) securitization facility that expires August 2017. At Jan. 2, 2016, Flowers had $323.1 million available on its revolver and $2.1 million available under its A/R facility. The company typically maintains minimal cash on its balance sheet.

Flowers' credit facilities subject the company to a maximum leverage ratio of 3.75x and a minimum interest coverage ratio of 4.5x. Aggregate maturities of long-term debt over the next three years totalled $74.7 million, $292.2 million, and $70 million at Jan. 2, 2016.

Fitch currently rates Flowers Foods as follows:

--Issuer Default Rating (IDR) at 'BBB';

--Senior unsecured revolving credit facility at 'BBB';

--Senior unsecured term loan at 'BBB';

--Senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: August 14, 2015

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003066

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60628
or
Secondary Analyst
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Committee Chairperson
Bill Densmore
Senior Director
+1-312-368-3125
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Carla Norfleet Taylor, CFA
Senior Director
+1-312-368-3195
Fitch Ratings, Inc.
70 W. Madison
Chicago, IL 60628
or
Secondary Analyst
Monica Aggarwal, CFA
Managing Director
+1-212-908-0282
or
Committee Chairperson
Bill Densmore
Senior Director
+1-312-368-3125
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com