OREANDA-NEWS. June 16, 2015. Fitch Ratings has affirmed Ocean Spray Cranberries, Inc.'s (Ocean Spray) Issuer Default Rating (IDR) at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

Strong Market Position

Ocean Spray's credit ratings reflect its dominant share in the shelf stable cranberry juice and dried cranberry segments. Importantly, Ocean Spray's strong focus on innovation in their beverage and snack portfolio mitigates in part a relatively narrow product line that is mainly dependent on a single fruit. Ocean Spray's market position with its premium, highly-recognizable brand has generated a good level of consistent profitability for a consumer goods company. Consequently, Ocean Spray has not experienced the market share and volume erosion that has occurred in the shelf stable juice segment during the past several years due to competition, shift in consumer preferences and consolidation within the supermarket chains. Nevertheless, larger, well-capitalized beverage companies remain a significant threat given their resources and a wider variety of alternative beverage options.

Market Leadership, Brand Equity

Ocean Spray is a marketing cooperative that is wholly owned by approximately 800 cranberry and 40 grapefruit growers. Approximately 60% of the world-wide cranberry crop is received, processed, and marketed through Ocean Spray resulting in approximately \\$1.7 billion in net sales. Ocean Spray also has a material presence in the grapefruit industry. The cooperative provides a stable organizational structure for cranberry grower-owners that greatly supports Ocean Spray's marketing/advertising, new product development/innovation and demand planning. Consequently, Ocean Spray has generated material profitable returns for its grower-owners during the past several years.

Innovation Key

Ocean Spray will need to continue leveraging innovation efforts into successful new products and categories to stem on-going competitive intrusions and create new growth avenues to help mitigate operating challenges with supply-demand imbalances. As part of these efforts, Ocean Spray must also address public concerns over high sugar content in its products through public relations campaigns and adaptation of their product portfolio.

As such, PACT cranberry extract water is Ocean Spray's new cranberry extract water, an important innovation that targets consumers seeking healthier beverages that are fresh, natural, flavorful and minimally processed. PACT cranberry extract water which has a low sugar content and contains the health promoting elements inside the cranberry, will be distributed nationally by PepsiCo, Inc. Ocean Spray will also likely leverage PACT cranberry extract water development into other beverage products to improve health and wellness function.

Financial Flexibility Limited

Ocean Spray's financial flexibility is currently a factor that constrains the ratings. Ocean Spray's cooperative status results in high cash patronage payments of its profits to its grower-owners leaving the company significantly more reliant on external sources of liquidity particularly in times of high investment periods. In addition, the high member cash payments hinder the company's ability to deleverage following increases in debt. As such, Ocean Spray's narrow product focus and high cash patronage payments are major elements in limiting the IDR to the 'BBB' category. Fitch believes Ocean Spray needs to demonstrate a track record for reducing debt, increasing the level of growers' equity and maintaining sufficient external access for liquidity to ensure appropriate flexibility.

Increased Leverage Expected

Estimated leverage at the end of the second fiscal quarter 2015 was 3.0x, flat to the end of fiscal 2014. Fitch expects Ocean Spray's leverage will increase moderately higher to an estimated 3.4x at the end of fiscal 2015. This is due to several factors including the delayed benefit from restructuring pool payments and pool year advances. In fiscal 2016, the expectation is for Ocean Spray to generate excess discretionary cash flow that would reduce leverage to the low 3x range.

Ocean Spray has minimal off-balance sheet lease obligations as the company owns the majority of its facilities and most lease obligations typically relate to office and industrial equipment. Ocean Spray's upcoming maturities during fiscal 2015 and fiscal 2016 should be relatively modest following the refinancing of term notes due in fiscal 2016.

Equity Treatment Considerations

Fitch gives Ocean Spray's subordinated debt and preferred stock each 50% equity treatment based on methodology outlined in Fitch's hybrid debt criteria report. Key attributes for both instruments include the ability to defer coupon payments for up to five years. Other factors that support 50% equity treatment include the cumulative nature of the preferred stock dividend and for the subordinated debt, no cross default or cross acceleration triggers are present in the event of default on Ocean Spray's senior debt.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:

--Modest revenue decline assumed for fiscal 2015. In fiscal 2016, Fitch expects Ocean Spray will increase revenue in the low single digits;
--Cranberry COGS adjustment in the midsingle digit of revenue for imputed cost of cranberries;
--Gross margins (with cranberry COGS adjustment) in the mid 20% range for fiscal 2015 and 2016;
--In fiscal 2016, Ocean Spray is expected to derive cash flow benefits from adjusting grow-owner payment schedules to better align grower advances to pool earnings.
--Leverage (Debt / adjusted EBITDA) will increase to approximately 3.4x at the end of fiscal 2015, before declining to the low 3x range in fiscal 2016.

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

--Total adjusted debt-to-operating EBITDA sustained below the 3.0x range due to operating income growth and/or debt reduction;
--Demonstrated ability to generate discretionary cash flow to reduce debt;
--Low single-digit revenue growth driven by innovation;
--Increase in grower equity to the upper 20% to the low 30% range of debt to capitalization;
--Per barrel patronage rates reflecting healthy operating conditions for Ocean Spray and its member-owners;
--EBITDA margins (absent COGS adjustments) sustained at least in the low 20% range.

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

--Total adjusted debt-to-operating EBITDA sustained above mid 3x range due to materially lower than expected operating income, or unanticipated debt-financed acquisitions;
--Negative cash deficit over multiyear period driven by higher capital investment and working capital requirements funded by debt;
--Revenue declines in the low to mid-single digits;
--EBITDA margins (absent COGS adjustments) sustained below 20%;
--Grower equity as a percent of total capitalization declines to the low 20% range or less;
--Lack of appropriate level in external liquidity with sufficient covenant capacity in the event of a material revolver draw-down.
--Persistent industry oversupply that causes per barrel patronage rates to fall significantly into the \\$20 per barrel range or less for a sustained period of time;
--A material adverse outcome associated with the current class action lawsuit that requires Ocean Spray to materially increase debt;

LIQUIDITY

Ocean Spray's liquidity is supported by its good cash flow generation and subordinated grower payments. Fitch believes the subordinated nature of Ocean Spray's patronage payments to any loan agreements or preferred stock distribution provides additional protection and credit enhancing restrictions in the unlikely event of an unforeseen drop in profitability and cash flow. The board of directors for Ocean Spray must approve each patronage payment allowing the payment to be withheld or adjusted for business needs.

Ocean Spray recently amended and increased the size of its credit agreement to \\$820 million including a \\$300 million revolving commitment with a \\$100 million accordion that matures in 2020. Fitch believes Ocean Spray maintains an appropriate level of external liquidity with sufficient covenant capacity with the new amended agreement in the event of a material revolver draw-down. This also provides Ocean Spray with sufficient cushion if capital market access becomes limited. Current cushion under the debt to consolidated capitalization and consolidated shareholders' equity covenants are sufficient.

A class action lawsuit was filed against Ocean Spray by a small group of cranberry growers during 2012. Recent decisions by the court dismissed 10 out of the 13 counts. While the litigation could likely take significant time before a resolution occurs, Fitch believes the company retains flexibility to mitigate against the costs required to defend this suit and the potential negative effects of adverse findings.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings for Ocean Spray:

--Long-term IDR at 'BBB-';
--\\$150 million 6.25% series A preferred stock at 'BB'.