OREANDA-NEWS. Fitch Ratings has affirmed Labeyrie Fine Foods SAS's (LFF) 5.625% EUR355m senior secured notes at 'B+'/'RR3' on completion of a EUR80m tap issue on top of the existing amount of EUR275m. Labeyrie Fine Foods SAS has a Long-term Issuer Default Rating (IDR) of 'B' with a Stable Outlook.

The affirmation of the senior secured notes rating follows the closing of Pere Olive's and King Cuisine's acquisition on 1 March 2016 and receipt of documents materially conforming to information previously received. The rating is the same as the expected rating assigned to the upsized senior secured notes on 3 February 2016, when we last affirmed the IDR.

KEY RATING DRIVERS
M&A, Rating Headroom
The acquisitions of Aqualande's downstream activities, Pere Olive and King Cuisine improve the group's business risk profile. However, post the transaction and the impact of the avian flu, Fitch expects LFF's (funds from operations) FFO adjusted gross leverage to peak at 6.0x for the financial year ending June 2016 (FY15: 5.1x) and to remain elevated at 5.8x in FY17 (acquisitions' contribution taken into account from their integration date). Such levels are outside of Fitch's leverage guideline for LFF's 'B' rating. Therefore the group retains only limited financial flexibility for further bolt-on acquisitions, and Fitch assumes that any further large acquisitions would be at least partly equity-funded. Based on these assumptions, we expect LFF's FFO adjusted gross leverage to decrease below 5.5x in FY18, within Fitch's leverage guidance for a 'B' IDR.

No Rating Impact from Avian Flu
Fitch expects the impact of avian flu in France on LFF to be temporary, and therefore manageable for current ratings. Foie gras and other duck products represented only EUR117m (13.4% of group sales) in FY15. We understand from health authorities that the disease does not impact the health of the ducks, and that it is not transmissible from ducks to human beings. Therefore we believe that the adverse effect on the company's revenues will be broadly limited to a contraction of available volumes y proportionate to the duck slaughtering stoppage of approximately four months imposed by the French government during 2016.

However, the impact on profits could be moderately greater and we have conservatively assumed a EUR10m EBITDA hit spread between FY16 and FY17. Fitch estimates the impact from this incident on FFO gross leverage of up to 0.5x in FY17.

Successful Acquisition Track Record
The rating and Stable Outlook also reflect LFF's demonstrated ability at integrating acquisitions, as with Blini and Farne. Fitch sees little execution risk in the integration of groupe Aqualande SA's downstream activities (transaction to be completed by end-April 2016), King Cuisine and Pere Olive. The three companies are positioned in fast-growing markets and enjoy profit margins that are higher than the existing LFF group. Fitch does not expect any significant negative impact from a failure to integrate the lower-margin Sales Sucres (acquired in July 2015) due to its small size.

Scale and Diversification
Fitch views positively management's acquisition strategy as it helps diversify the group's operations by product range, raw materials and geography, and reduces sales seasonality. In particular, we expect the local footprint acquired in Belgium (Pere Olive) and the Netherlands (King Cuisine) to support organic growth and help reduce reliance on France and the UK.

Furthermore, Pere Olive and King Cuisine enlarge the group's less seasonal segment "Everyday Delicatessen". Aqualande should help diminish the sales and EBITDA seasonality of the Premium Delicatessen business unit while improving product diversity (smoked trout as opposed to mainly smoked salmon and foie gras) and price points as well as organic growth prospects.

Sustained Profitability
Fitch expects LFF's EBITDA margin to be sustainable at 8.2% in the medium term (FY15: 8.6%). Continuously high raw material prices for Norwegian salmon and prawns, combined with unfavourable FX variations and strong buying power from highly concentrated food retailers should continue to exert pressure on gross margin. Furthermore we expect the group to maintain significant marketing investments to support volumes and the expansion of new product ranges.

However, these negative factors are likely to be counterbalanced by the group's enlarged scale, further industrial efficiencies (including synergies from acquisitions), and product mix improvements supported by its strong brand image and demonstrated innovation capacity.

Seasonality and Leverage
We adjust LFF's debt - and therefore FFO gross leverage - at financial year-end to take into account the company's factoring utilisation during the year. We view the factoring line as a super-senior claim due to its strategic interest to the group and its use to fund recurring operations. At FYE15 an adjustment of EUR28m increased LFF's FFO gross leverage by 0.4x to 5.1x. Due to the seasonality of sales, Fitch still expects debt (including outstanding factoring line) to be higher at the peak of the season than at financial year end.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for LFF include:
- Around 16% increase in sales in FY16 (acquisitions' contribution from date of integration).
- EBITDA margin to drop to 8.2% in FY17, broadly stable thereafter.
- Working capital changes in line with sales development.
- Annual capex at 3.3% of sales.
- No dividends.
- Average annual FCF margin at 1% of sales over FY16-FY18 (FY15: -1.7%).
- EUR117m acquisition spending in FY16, minimal bolt-on spending thereafter.

RATING SENSITIVITIES
Positive: future developments that could lead to positive rating action include:
- A strengthened business profile as reflected in meaningfully lower product seasonality and higher geographic, product and customer base diversification.
- EBITDA margin trending towards 10% together with higher cash flow generation.
- FFO adjusted gross leverage consistently below 4.0x at financial year end and below 5.0x at end-1H of financial year (December, including outstanding factoring line).

Negative: future developments that could lead to negative rating action include:
- EBITDA margin below 7.5% on a sustained basis.
- Neutral to negative FCF margin for two consecutive years.
- FFO adjusted gross leverage above 5.5x at financial year end and 6.5x at end-1H of financial year (December, including outstanding factoring line).

LIQUIDITY
Following completion of the acquisitions planned for FY16 Fitch expects LFF's liquidity to remain adequate, supported by positive FCF generation, a EUR45m revolving credit facility maturing in 2020 and a EUR80m factoring facility maturing in 2017. Furthermore, as the bulk of its debt has a bullet maturity, LFF faces only minor scheduled debt repayments until 2020.