S.&P. revises Dean Foods' rating to stable

by Eric Schroeder
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NEW YORK — Standard & Poor’s Ratings Services has revised its rating outlook on Dallas-based Dean Foods Co. to stable from negative, while also affirming the company’s B+ corporate credit rating, BB- senior secured rating, and B- senior unsecured rating.

S.&P. said Dean Foods had about $3.77 billion of total debt outstanding as of Dec. 31, 2011.

“The outlook revision is based on Dean Foods’ improved EBITDA cushion on its financial covenants following debt reduction in 2011, and our view of some recent improvements in dairy processor industry conditions and Dean Foods’ operating results,” said Jeffrey Burian, a credit analyst with S.&P.

Additionally, S.&P. said the ratings reflect the view that Dean Foods’ financial risk profile is “highly leveraged” and its business risk profile is “fair,” as defined in S.&P.’s criteria.

Key credit factors that S.&P. said it considered in its assessment of Dean Foods’ business risk profile include the company’s exposure to U.S. dairy industry conditions, characterized by reduced fluid milk demand, excess production capacity, a shift by consumers away from higher-margin branded milk sales as economic conditions weakened, and recently high raw milk and commodity input costs.

Other key credit factors cited by S.&P. include Dean Foods’ position as the leading national dairy company in the United States; the company’s portfolio of national, regional, local, and private label brands with solid regional market positions; the company’s extensive national refrigerated distribution network; and its rapidly growing value-added segments.

“The stable outlook reflects our anticipation that the company will maintain adequate liquidity and covenant cushion, and credit measures near current levels,” S.&P. said. “We could consider an upgrade if Dean Foods achieves and sustains strengthened credit measures in line with indicative ratios for an aggressive financial risk profile, including an adjusted total debt to EBITDA ratio between 4x and 5x, and a ratio of FFO to total debt in the range of 12% to 20%, and the company’s covenant cushion is sustained above 15%.”

S.&P. said it may consider a downgrade to Dean Foods’ ratings “if the company’s financial policies become more aggressive, if leverage increases significantly, if operating performance and cash flow deteriorate substantially, if liquidity becomes constrained, or if the company’s covenant cushion declines to well below 10%.”

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