CSM Bakery Solutions LLC Downgraded To 'CCC' On Elevated Refinancing Risk; Outlook Revised To Negative

  • U.S. based- CSM Bakery Solutions LLC's $105 million asset-backed lending facility (unrated) and €390 million (outstanding) dollar-denominated first-lien term loan (both due July 2020) will mature within a year by next month and financial metrics remain very weak with leverage above 15x. Additionally, free operating cash flow is negative and liquidity is less than adequate.
  • Although the company has used certain asset sale proceeds to repay debt in 2017, the prospects of a successful refinancing remain in doubt because its core operations continue to underperform expectations after never fully rebounding from a poorly executed 2016 enterprise resource planning implementation that caused significant customer losses and led to a costly restructuring of its North America business.
  • We are lowering our issuer credit rating to 'CCC' from 'CCC+' because we believe the company may not be able to refinance its capital structure given its still very weak credit metrics and will likely default within the next 12 months.
  • We also lowered our issue-level ratings on the company's first-lien term loan to 'CCC+' from 'B-' and second-lien term loan to 'CC' from 'CCC-'. The '2' and '6' recovery ratings, respectively, are unchanged.
  • The negative outlook reflects the possibility that we may lower the rating further if we believe an event of default is inevitable within a six month time frame.
NEW YORK (S&P Global Ratings) June 21, 2019--S&P Global Ratings today took the rating actions listed above. The rating actions reflect heightened refinancing risk and constrained liquidity as the ABL and first-lien term loan mature in the next 12 months and leverage remains in the double-digits. We believe a default in the next 12 months is likely given the company's $105 million asset-backed lending (ABL) facility and first-lien term loan (currently €390 million drawn) mature in July 2020 while operating performance and credit measures still remain weak. The company has not turned around the business after its North American 2016 enterprise resource planning (ERP) implementation disrupted order booking and fill rates, prompting customers to seek other suppliers. The company continues to have lower sales volumes because of significant customer losses and continued high operating costs despite efforts to restructure its business by rationalizing stock keeping units (SKUs) and closing facilities. The company still is not generating positive free operating cash flow (FOCF) and is relying on its ABL to fund its quarterly interest payments. CSM successfully extended the ABL's maturity last year from July 2019 to July 2020. However, because leverage is still high and the company now faces a maturing term loan in addition to its ABL, it may not be able to refinance these pending maturities in full, particularly if the currently choppy credit markets further weaken and erode market liquidity. Moreover, the ABL has a springing maturity of 60 days inside the first-lien term loan, which further shortens the window for a successful refinancing.
The negative outlook on CSM reflects the risk of a lower rating driven by a belief that a default is inevitable within a subsequent six month period.
We could lower the rating over the next 12 months if the company's liquidity position continues to weaken and is unable to successfully address its ABL and first-lien term loan July 2020 maturities.
We could raise the rating if the company refinances its capital structure and improves its liquidity profile, significantly reducing the risk of a default. Additionally, we could raise the rating if the company improves profitability in both its North America and Europe segments and realizes cost savings from previously implemented restructuring programs, leading to positive FOCF in 2019.
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