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Rating Action: Moody's assigns B2 ratings to Signature Foods B.V. following corporate reorganisation; outlook stableGlobal Credit Research - 27 Jan 2022Milan, January 27, 2022 -- Moody's Investors Service ("Moody's") has today assigned a B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to Signature Foods B.V. ("Signature Foods" or "the company"), a leading producer of chilled convenience food in the Benelux region. The outlook is stable.At the same time, Moody's has withdrawn the existing B2 CFR, the B2-PD PDR and the stable outlook of PHM SF Dutch Bidco B.V. The withdrawal of the ratings and outlook of PHM SF Dutch Bidco B.V and assignment of the ratings and outlook to Signature Foods B.V. follows a corporate reorganisation whereby Signature Foods B.V. assumed all obligations in respect of the senior secured bank credit facilities. Signature Foods B.V. is the new top entity of the restricted group.A full list of affected ratings is provided towards the end of the press release.RATINGS RATIONALEMoody's has withdrawn the CFR, PDR and outlook of PHM SF Dutch Bidco B.V. and assigned those ratings and outlook to Signature Foods B.V. because of the corporate reorganisation whereby PHM SF Dutch Bidco B.V., which was the issuer of the E341 million senior secured term loan B due 2028 and the E62 million senior secured revolving credit facility (RCF) due 2027, was merged into Signature Foods B.V..As a result of the merger, PHM SF Dutch Bidco B.V. ceased to exist, while the surviving entity Signature Foods B.V. assumed all obligations of PHM SF Dutch Bidco B.V. in respect of the facilities agreement, the intercreditor agreement and any relevant security documents. Moody's understands that this transaction did not have an impact on the underlying terms and conditions of the two debt instruments.The B2 rating assigned to Signature Foods B.V. continues to reflect (1) the company's leading market positions in niche product categories across the Benelux region and Poland; (2) its strong portfolio of locally recognised brands and superior product development capabilities, which allow it to set premium prices and gradually gain market share; (3) the supportive market fundamentals, with a track record of growth across the key product categories; (4) a track record of positive free cash flow generation, supporting adequate liquidity; and (5) its resilience to the coronavirus pandemic owing to its focus on the food retail channel, as well as its well-recognised brands in the Benelux region.The rating is, however, constrained by the company's (1) modest scale and focus on niche product categories; (2) very limited geographical diversification beyond the Benelux region, with around 64% of sales generated in the Netherlands and 26% in Belgium; (3) increasingly maturing product categories; (4) the current raw material price inflation, which could temporarily erode margins in case of delay in passing higher costs to customers; (5) its high leverage of around 6.0x, which is expected to decline towards 5x in the next 12-18 months; and (6) its appetite for acquisitions, which entails integration risks and a potentially slower deleveraging trajectory.Moody's estimates that Signature Foods' Moody's-adjusted gross/debt EBITDA as of March 2022 will remain slightly above 6.0x, at the higher end of the rating agency's expectation for the B2 CFR. This is above the expectations at the time of original rating assignment in January 2021, mainly owing to two acquisitions which were funded through drawings under the RCF.However, Moody's expects that the company will be able to reduce its leverage towards 5x in the next 12-18 months supported by continued improvement in operating performance, the achievement of synergies from the integration of the acquired companies, and its positive free cash flow generation.Signature Foods' appetite for bolt-on acquisitions remains high, reducing visibility on its deleveraging trajectory.LIQUIDITYSignature Foods has adequate liquidity, supported by E18 million of cash on balance sheet as of December 2021. In addition, the company has access to a E62 million RCF, which has been partially drawn by E35 million to fund two acquisitions. There is ample headroom under the springing covenant of senior secured net leverage not exceeding 9.5x, tested when the facility is more than 40% drawn.Although available liquidity has reduced following the two debt funded acquisition, Moody's expects Signature Foods to generate positive Moody's-adjusted free cash flow of around E8 million in financial year 2022 despite higher capital spending, and at least E25 million per year thereafter. Assuming no RCF utilisation, the company will have no material debt maturities until 2028, when its term loan is due.STRUCTURAL CONSIDERATIONSThe B2 ratings on the E341 million senior secured term loan B and the E62 million senior secured RCF, both borrowed by Signature Foods B.V., are in line with the CFR, reflecting the fact that these two instruments rank pari passu and represent substantially all of the company's financial debt. The senior secured term loan B and the senior secured RCF benefit from pledges over the shares of the borrower and guarantors as well as bank accounts and intragroup receivables and are guaranteed by the group's operating subsidiaries representing at least 80% of the consolidated EBITDA. Moody's considers the security package to be weak, in line with the rating agency's approach for shares-only pledges.The capital structure includes a E87 million PIK facility due in 2029 and borrowed by PHM SF Dutch Holdco B.V., an entity outside of the restricted group. All interest on the PIK facility is capitalised, so there is no cash leakage from the restricted group. This instrument was downstreamed into the restricted group as equity, and therefore, Moody's does not include this instrument in its leverage calculations.The B2-PD PDR assigned to Signature Foods reflects Moody's assumption of a 50% family recovery rate, given the weak security package and the limited set of financial covenants comprising only a springing covenant on the senior secured RCF, tested only when its utilisation is above 40%.RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects Moody's view that Signature Foods will be able to gradually increase its sales at a mid-single-digit rate while maintaining or improving its healthy margins, with Moody's-adjusted gross debt/EBITDA moderately declining towards 5x in the next 12-18 months, and to continue generating positive free cash flow on a sustainable basis.The stable outlook also factors in Moody's expectation that the company will maintain a prudent approach to acquisitions, so that any potential future transactions will not lead to a material increase in its leverage on a pro forma basis or further stain its liquidity profile.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSSignature Foods' ratings could be upgraded if it (1) increases its scale and enhances its business profile, including more diversified product range and geographical presence; (2) reduces its Moody's-adjusted gross debt/EBITDA below 4.5x on a sustainable basis; (3) continues to generate solid positive free cash flow; and (4) maintains adequate liquidity. Given the presence of the PIK instrument outside of the restricted group, there is a risk that it could be refinanced inside the restricted group once sufficient financial flexibility develops, limiting upward pressure on the rating.The ratings could be downgraded if (1) the company fails to reduce and maintain its Moody's-adjusted gross/debt EBITDA below 6.0x as a result of softer sales, erosion of profit margins or significant debt-financed acquisitions; (2) the company's free cash flow turns negative on a sustained basis; or (3) liquidity deteriorates.LIST OF AFFECTED RATINGSAssignments:..Issuer: Signature Foods B.V..... Probability of Default Rating, Assigned B2-PD.... LT Corporate Family Rating, Assigned B2Withdrawals:..Issuer: PHM SF Dutch Bidco B.V.....Probability of Default Rating, Withdrawn, previously rated B2-PD....LT Corporate Family Rating, Withdrawn, previously rated B2Outlook Actions:..Issuer: Signature Foods B.V.....Outlook, Assigned Stable..Issuer: PHM SF Dutch Bidco B.V.....Outlook, Changed To Rating Withdrawn From StablePRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILESignature Foods, domiciled in the Netherlands, is the leading producer of chilled convenience food in the Benelux region, with sales concentrated in the Netherlands (over 60% of revenue) and Belgium (around 26%). The company produces primarily spreads and dips (65% of revenue), a range of meal solutions, such as salads, bread snacks and pasta sauces (22% of revenue) and bites, including tapas and savoury snacks (14% of revenue). The company operates seven production facilities, including one in Belgium and one in Poland, and employs approximately 600 people. In the year ended March 2021, Signature Foods sold 73 thousand tonnes of food products and reported net sales of E305 million and management-adjusted EBITDA of E59 million.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. 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