OREANDA-NEWS. Fitch Ratings has revised Findus PledgeCo S.a.r.l's (Findus) Outlook to Positive from Stable, while affirming its Long-term Issuer Default Rating (IDR) at 'B-'. The agency has also affirmed Findus BondCo S.A.'s senior secured notes at 'B+' with a Recovery Rating of 'RR2'.

Findus PIK S.C.A.'s Issuer Default Rating (IDR) is also affirmed at 'CCC' and its EUR200m 8.25%/9% senior PIK notes at 'CC'/'RR6'.

The Outlook revision to Positive reflects Findus's robust financial performance for the financial year to September 2014, despite a challenging trading environment and currency headwinds in the Nordics. Findus has demonstrated it is able to achieve pricing power and defend its EBITDA margin despite increases in raw material prices (fish prices), due to cost reduction, product innovation and efficiency programmes. We see an upgrade to 'B' as possible in 2016, subject to Findus continuing its EBITDA improvement, moving to generate neutral to positive cash flows and achieving further deleveraging with FFO-based net leverage dropping below 5.5x.

KEY RATING DRIVERS

Strong Pricing Power
Findus demonstrated with its FY14 results that it was able to maintain its margins in the Nordics and improve its margins in the UK and southern Europe, by passing on to customers key input price increases. This is despite a competitive trading environment, especially in the UK where competition among the big UK retailers and discounters remains intense and where price deflation is being experienced in many food categories even by global packaged food companies such as Nestle (AA+/Stable) and Unilever (A+/Stable).

Strong Market Positions
Findus remains the leader in its key markets of UK, Norway and Sweden with high market shares in branded frozen food but with a concentrated product proposition where 66% of its sales are from fish and seafood. The UK chilled category enjoyed a 10% increase in EBITDA in FY14, compensating for the poor performance in the Nordics. It is now the company's largest segment by EBITDA (29%) and shows potential for further growth.

Improving Credit Metrics
Findus's funds from operations (FFO) adjusted gross leverage at FY14 improved to 5.9x from 6.4x in FY13. Fitch expects leverage to improve towards 5.5x with FFO fixed charge cover moving towards 1.8x by 2016. If maintained, this leverage profile would be considered fairly strong for the 'B-' rating relative to close peers. The improvements would be driven by continued investments in product innovation and successful negotiations of contracts with food retailers when adjusting prices for raw material costs changes.

Scope for EBITDA Growth
Fitch expects product innovation and efficiency programmes to continue mitigating both downward pricing pressure from major retail chains and an ongoing decline of frozen food consumption in its markets of operation. Cost reduction implemented during 2011-2013 will continue to bear fruit but we do not expect this to contribute substantially to growth in EBITDA. However, we project EBITDA margins to improve, albeit at a slow pace, on higher spending power by consumers in Findus's key markets, especially in the UK. Fitch also expects the UK chilled food division to be the key growth driver.

Currency Headwinds and Industry Risks
Fitch continues to expect currency headwinds in Findus's Nordics and southern European business to affect its financial position in FY15, before subsiding in FY16. The Swedish kroner depreciated by around 13% in 2014, leading to lower revenues and profits in GBP. Fitch projects it to further depreciate by another 15% in 2015. However, the EUR has fallen against GBP so far in 2015, benefiting the company's 60% senior outstanding debt that is denominated in EUR. In addition, soft demand from the challenging trading environment will remain a drag on Findus and will slow revenue growth.

Expected Recovery for Creditors
The senior secured notes' 'B+'/'RR2' rating reflects Fitch's expectation of superior recoveries in the range of 71%-90% in case of default. The instrument's rating is reflective of Findus's high FFO adjusted gross leverage of 5.9x and takes into account a GBP60m super senior facility ranking ahead of the bond. Driving these recovery expectations is an estimated post restructuring EBITDA of approximately GBP81m, reflecting a hypothetical adverse scenario of depressed sales and compressed margins as a function of increased competition and elevated commodity prices and a going concern multiple of 5x enterprise value/EBITDA.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- low single-digit organic sales growth in the UK and the Nordics from FY15 onward, consistent growth in southern Europe
- Depreciation of SEK/GBP by approximately 13-15% and EUR/GBP by close to 20% in 2015
- improvement in EBITDA margin driven by efficiency improvements, cost reductions, product innovations and raw material prices pass-through offset by higher marketing spending
- neutral-to-positive working-capital movements from FY15 onwards as well as capex in line with or slightly higher than historical levels
-neutral-to-positive free cash flow generation from FY15 onwards

RATING SENSITIVITIES

Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
- Maintaining an EBITDA margin of at least 8% and positive free cash flow generation on a sustained basis
- Further de-leveraging with FFO adjusted gross leverage to or below 5.5x on a sustained basis (FYE14: 5.9x).
- FFO fixed charge cover at 2x or above on a sustained basis (FYE14: 1.7x).

Negative: Future developments that could, individually or collectively, lead to negative rating actions include:
- A contraction in organic revenue, for example, resulting from increased competitive pressures, combined with a steady reduction in operating profitability leading to an EBITDA margin below 7%
- Consecutive periods of negative FCF leading to erosion of the liquidity cushion
- A sustained deterioration in FFO adjusted gross leverage to or above 7x
- FFO fixed charge cover sustainably at 1.5x or below

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity
Fitch expects that Findus's liquidity will remain adequate, supported by a super senior RCF of GBP60m and, in the longer term, by modest positive FCF generation from FY16.

No Maturities Before 2018
Findus's current debt includes approximately GBP400m of senior secured notes maturing in July 2018, and a RCF of GBP60m maturing in December 2017. While there is no debt amortisation pressure in the foreseeable future, we believe that the deleveraging path will be slow and dependent on growth in EBITDA. Fitch expects FFO adjusted gross leverage to remain at around 5.5x in 2016.