Italian Froneri workers spat resolved, Moody’s downgrades company to Ba3

Last year, Froneri – the $2.8bn joint venture set up in 2016​​ between Nestlé and R&R Ice Cream – announced it was closing the Parma plant as part of its cost-savings program.

The workers were supported by the FLAI-CGIL and UILA-UIL and the IUF unions.

In addition to financial compensation, the company will provide outplacement services, even for seasonal workers, and include in any sale agreement a guarantee of preferential hiring for the dismissed workers.

Downgraded rating

Today, Moody's Investors Service (Moody's) downgraded the corporate family rating (CFR) of UK-based ice-cream manufacturer Riviera MidCo SA (Froneri), part of Froneri group, to Ba3 from Ba2 and its probability of default rating (PDR) to Ba3-PD from Ba2-PD.

Concurrently, Moody's has downgraded the senior secured ratings on the existing facility (consisting of a term loan and revolving credit facility) of Froneri International plc to Ba3 from Ba2. The outlook on all ratings is stable.

Paolo Leschiutta a Moody's vice president and senior credit officer and lead analyst for the company, said the downgrade of Froneri's ratings to Ba3 reflects expectations that, following the company's decision to upsize its existing facility, its key credit metrics will remain weak until 2019, when benefits from the company's cost savings initiatives should materialize and result in a reduction in financial leverage.

"Proceeds from the add-on to the facility will be up-streamed outside of the restricted group and used to repay the existing €800m ($955m) shareholder loan provided by Nestlé S.A. (Aa2 stable). ​

“The loan was part of the financing for the joint venture created in October 2016 between Nestlé's ice cream and selected frozen food business mainly in Europe and the R&R Ice Cream's activities." ​

Rationale

Moody’s said today's downgrades reflect the fact that the additional €800m of debt within the restricted group will result in a sustained increase in the financial leverage of the restricted group.

This is measured as Moody's adjusted debt to EBITDA ratio, which is expected to exceed 5.5x at FYE December 2017 pro-forma for the transaction and to only gradually reduce towards 4.0x by December 2019.

Moody's calculations include only a number of the restructuring costs the company will sustain over the coming months in order to achieve the planned cost synergies following the creation of the joint venture.

These costs will continue to depress the company's Moody's adjusted profitability measures and free cash flow generation until the end of 2019.

The deleveraging during the next 12 to 18 months assumes that the company will be able to generate an incremental amount of cost efficiency which in Moody's view is subject to a degree of execution risks.

Stable rating

The Ba3 rating will be initially weakly positioned as cash generation will remain depressed by restructuring costs.

The rating is nonetheless sustained by the sound business profile of Froneri, according to Moody’s, as the second-largest ice cream business in Europe and the third largest globally; a geographically diversified presence in both mature and emerging markets; a good portfolio of brands, including Nestlé's brands, and with a strong presence in private label business; and good innovation capability.

The rating also reflects a degree of support from Nestlé, as the Swiss food producer will maintain its 47.9% ownership.

However, Moody’s said the rating is constrained by the business concentration on the seasonal ice cream activity and challenged by the integration process as the company targets a significant profitability improvement, expecting cost savings will exceed the original targets by 2021.

As at September 2017, Moody's said it understands that overhead savings were substantially higher than budgeted, which provides some comfort on the company's ability to achieve its cost reduction targets. This is somewhat offset by significant implementation costs.

In addition to that Moody's cautioned that limited financial information on the joint venture has been disclosed so far.

Stable outlook

The stable outlook reflects Moody's expectation of a gradual deleveraging through EBITDA growth due to cost savings and synergies.

This also assumes no dividend payments, no significant debt financed acquisitions and no reduction in the Nestlé's stake in the joint venture.

Positive rating pressure could develop if Froneri successfully achieves its cost savings program while achieving a financial policy that balances the interests of its shareholders and those of its creditors and reduces its Moody's adjusted debt/ EBITDA ratio towards 3.5x.

Downward rating pressure could develop if the company's leverage ratio (with Moody's adjustments) remains significantly above 4.5x on a sustainable basis, free cash flow remains negative beyond 2018, or if liquidity concerns arise.