Verdesian Life Sciences LLC Downgraded To 'CCC-' From 'CCC+' On Increased Refinancing Risk; Outlook Negative

  • Cary, N.C.-based agricultural crop nutrient supplier Verdesian Life Sciences LLC's operating performance in 2018 was well below our expectations. The company faces significant refinancing risk with its revolving credit facility coming due in July 2019 and its term loan coming due in July 2020.
  • We lowered our issuer credit rating on Verdesian to 'CCC-' from 'CCC+'.
  • We also lowered the issue-level rating on the company's senior secured credit facility to 'CCC-' from 'B-' and revised the recovery rating to '3' from '2' to reflect the lower issuer credit rating and weakened recovery prospects.
  • The negative outlook reflects the company's current covenant restrictions, which limit its liquidity position, and significant near-term refinancing risk, along with a risk of default if the company is unable to refinance.
NEW YORK (S&P Global Ratings) May 10, 2019--S&P Global Ratings today took the rating actions listed above. The downgrade reflects weakened operating performance through December 2018, which led to credit measures falling well below our expectations, and our belief that these credit measures are unsustainable. The company has dealt with unfavorable market conditions, including customer inventory destocking, wet winter and spring weather, and supply constraints on select raw materials, namely granulated peat. In addition to the weakened operating performance and limited diversity of the company, Verdesian's revolver due date looms in July 2019. We believe this maturity poses a high near-term refinancing risk, particularly given the company is reliant on the revolver and typically carries minimal cash balances. However, the cost savings initiatives that the company implemented in 2018 should have a favorable impact on 2019 EBITDA, but it must address the refinancing within the next two months to avoid an otherwise highly likely default.
Verdesian competes in small niche segments of the overall agriculture industry, which historically has seen good profitability and limited penetration. In addition, if larger and stronger-capitalized companies more forcefully compete in these niche spaces over the longer term, the company could face additional pricing and distribution challenges. Verdesian is small in overall size and scale and has a narrow product focus, producing mostly additives that supplement nitrogen and phosphorus fertilizers. It has high customer concentration and sells its specialized products to distributors that carry great influence over large crop growers' purchasing decision. Verdesian is vulnerable to general downturns in its agricultural markets, which was quite evident when EBITDA dropped significantly. The company's fertilizer additives are a discretionary expense rather than a necessity, and as such could be the first to go when farm incomes decrease.
The negative outlook reflects our expectation that Verdesian faces significant refinancing risk within the next few months and that credit metrics in 2018 and 2019 will be materially weaker than we previously forecasted, and at unsustainable levels. We also believe that unless the company can successfully refinance its revolver and existing bank loan, it will continue to have liquidity restraints given low cash balances and covenant restrictions on its existing revolver, and faces the possibility of a default or a distressed exchange.
We could consider a downgrade in the next few months if the company does not successfully refinance its revolver. In addition, if weakened operating performance as the result of ongoing supply constraints with key raw materials, competition from alternative products, or weather-related issues continue, or management chooses to adopt more aggressive financial policies, we could take a negative rating action.
We could consider an upgrade within the next few months if the company successfully refinances its revolver and we believe it will improve operating performance from depressed 2018 levels.
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