OREANDA-NEWS. S&P Global Ratings today assigned its 'B' corporate credit rating to New York-based Chobani Global Holdings LLC and the borrower, Chobani LLC. The outlook is stable.

At the same time, we assigned our 'B+' issue-level rating and '2' recovery ratings to the company's proposed $150 million revolving credit facility due in 2021 and $650 million first-lien term loan due 2023. The '2' recovery rating indicates our expectation for substantial (lower end of the 70%-90% range) recovery in the event of a payment default. We also assigned our 'CCC+' issue-level rating and '6' recovery rating to the company's existing $750 million second-lien term loan due in 2020. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery in the event of a payment default.

Chobani expects to use proceeds from the debt offering to repay approximately $334 million under its existing revolving credit facility, repay $281 million of the existing second-lien term loan (including the corresponding call premium), and pay estimated fees and expenses.

Pro forma for this offering, we estimate the company will have roughly $1.3 billion in adjusted debt outstanding. We include $68 million of notes payable for the New Markets Tax Credit Program to our adjusted debt balance.

The ratings reflect Chobani's highly leveraged capital structure, narrow business focus in Greek yogurt that is vulnerable to changing consumer tastes and preferences, substantial exposure to dairy price fluctuations, and participation in a highly competitive industry against larger packaged food companies. The ratings also reflect Chobani's good brand recognition and scale with revenues approaching about $1 billion in 2016, although concentrated primarily in the U. S.

"We estimate pro forma debt leverage for this transaction is roughly 8x, and our expectation is for debt to EBITDA to remain at this level by the end of fiscal-year 2016 and fall to about 6.5x by the end of 2017," said S&P Global Ratings credit analyst Amanda O'Neill. "We believe that the proposed transaction will improve the company's liquidity profile, cash flow, and overall capital structure. It would also extend the maturity of the company's existing revolving credit facility that is due to mature in September 2017, free up liquidity, and reduce interest expense."

The stable outlook incorporates S&P Global Ratings' expectation for the company to reduce leverage to about 6.5x by the end of 2017 through EBITDA expansion from volume growth, improved operating leverage, and cost savings, from about 8x currently. We also expect the company to maintain adequate liquidity from access to its new revolver, despite our expectation for continued negative free operating cash flow in 2016 from continued investments in its two facilities to improve efficiency and drive growth. We expect free operating cash flow to turn positive in 2017 as the company's capital expenditures decrease.

We could consider lowering the ratings if debt to EBITDA is sustained above 7x and free operating cash flow does not improve and start to turn positive in 2017. This could occur if the company were unable continue to grow its revenues in the double-digits from new product innovations, to successfully execute on its plan to achieve operating leverage and cost-savings, or if the price of milk increases to a level whereby we expect gross margins to contract by over 200 basis points from our base case forecast. We estimate a $2 increase in the price of milk per gallon could result in EBITDA margin contraction of about 200 basis points. We also believe that the company may not be able to deleverage if competition intensifies leading to a substantial loss of market share to its larger competitors or of the company experiences additional product quality issues leading to significant revenue declines and EBITDA contraction.

Although unlikely in the next 12 months, we could consider raising the ratings if the company deleverages to below 5x and improves its cash flow generation, demonstrates a track record of strengthening financial performance, and diversifies its product portfolio away from Greek yogurt increasing its scale. We believe that the company would have to start generating positive free operating cash flow to do so, which we do not expect until at the earliest 2017.