Canadian dairy giant Saputo Inc. has had its credit rating cut by one ratings agency after completing its $1.7-billion acquisition of Britain-based Dairy Crest Group plc.
Credit-rating agency DBRS said it downgraded both the company’s rating and that of Saputo’s senior unsecured notes to BBB (high) from A (low). A triple-B rating signifies that a company’s capacity to pay its financial obligations is acceptable, but may be vulnerable to future events. Investors look to corporate credit ratings for a sense of how the company’s debt securities should be priced.
DBRS attributes the downgrade to Montreal-based Saputo using a bank term loan to finance the acquisition of Dairy Crest.
The agency estimates that the cheese, milk and yogurt company’s balance-sheet debt will grow to around $4.5-billion, from $2.5-billion, as a result of the deal. The additional leverage puts Saputo in the BBB category, DBRS said.
“The downgrade reflects DBRS’s view that the increase in financial leverage outweighs the moderately positive benefits to the business profile from increased size and scale, as well as enhanced geographic and product diversification,” the ratings agency said in a release Wednesday.
Saputo did not respond to a request for comment.
DBRS said it only downgraded Saputo’s rating by one notch because of the company’s strong cash flow and because the agency expects Saputo to start paying down its debt promptly.
“We’ve followed Saputo for quite some time now and they have a history of using debt to finance growth and acquisitions, and then following those acquisitions, using their free cash flow to pay down debt,” Michael Goldberg, senior vice-president of consumer products and retail at DBRS, said in an interview. “They have pretty conservative financial policies.”
It’s the first time that DBRS has changed Saputo’s rating, which has sat at A since the ratings agency started following the dairy company five years ago, Mr. Goldberg said.
“If for whatever reason they do another debt-financed acquisition, or competition increases and the earnings come under pressure and they’re not able to pay down as much debt as we currently expect, then it’s possible that another downgrade could occur,” Mr. Goldberg said.
The credit-rating agency also removed Saputo’s ratings from being under review with negative implications. Saputo was placed under review on Feb. 26 when it first announced the acquisition.
The credit downgrade makes Saputo less likely to pursue another debt-financed acquisition in the near future, such as that of Dean Foods Co., Mr. Goldberg said. As The Globe previously reported, the U.S. milk producer effectively put itself up for sale when it announced in late February that its board is exploring strategic options. Saputo has been rumoured to be a potential suitor, though the company has declined to comment on the matter.
Integrating two large acquisitions at the same time would pose a challenge for the company’s management, Mr. Goldberg said, but he didn’t rule out the possibility of a deal.
“It doesn’t have to be debt-financed,” Mr. Goldberg said. “If the level of leverage is a concern, they could potentially use equity to finance any acquisition in the future.”
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