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Lenders to provide relief for Kainos Capital’s Milk Specialties

  • Nutritional products company carrying leverage of 5.4x EBITDA
  • Milk Specialties was part of HM Capital
  • Lenders give company more time to file financial statements

Milk Specialties Co, which makes protein ingredients for Muscle Milk and other products, will soon finish preparation of the financial statements, according to a March 2 note from Standard & Poor’s Ratings Services. The completed statements will allow the company to win a waiver from lenders on its requirement to file financial information within 120 days of the end its fiscal year.

An inventory issue at one of the company’s plants prompted it to launch a forensic accounting review last year. S&P placed the company on CreditWatch with negative implications on Nov. 3 after Milk Specialties failed to file its financial statements. 

Looking ahead, S&P said Milk Specialty Co’s earnings and cash flow should improve, given the outlook for lower whey and milk-based costs.

“As the estimated largest independent whey processor in North America, with whey accounting for a significant portion of its cost of goods, the company is highly exposed to whey supply-and-demand fluctuations,” S&P said. “Partly mitigating some of the supply risks are the company’s significant investment in scale, its proximity to its suppliers, its diverse supplier base, and the existence of multi-year agreements for a portion of its volume.”

Separately, Milk Specialties Co, also known as Milk Specialties Global, may be put up for sale, according to a published report. The company could fetch a price of up to $1 billion, including debt, The Wall Street Journal reported Feb 20.

Debt multiple may improve

S&P analysts Kim Logan and Chris Johnson said Milk Specialties’ cash sources will exceed uses by more than 1.2x over the next year, based on its expected funds from operations, credit line availability and minimal debt maturities.

For the 12 months ended Sept. 30, Milk Specialties carried debt of about 5.4x EBITDA. The company may be able to improve its debt-to-EBITDA ratio to 4.8x by the end of March next year, S&P said.

As of Sept. 17, the company had $244 million of total debt outstanding.

The positive comments by S&P mark a favorable turn for the Eden Prairie, Minn.-based company. On March 2, S&P affirmed its B- corporate credit rating on Milk Specialties. The B- rating means the company is more vulnerable to adverse business, financial and economic conditions but has the capacity to meet financial commitments, according to S&P’s rating definitions.

S&P also raised its rating on Milk Specialties’ senior secured from B- to B, and it revised the company’s recovery rating to reflect a $20 million debt re-payment on its term loan and a $2 million reduction in revolver commitments.

Milk Specialties was one of several companies in a portfolio taken over by Kainos Capital when it spun out of HM Capital in 2013. Along with Milk Specialites, the portfolio included Earthbound Farms (also known as National Selection Foods) and Advanced H20, which changed its name to Advanced Refreshment. Kainos Capital sold Earthbound Farm to WhiteWave Foods Co for $600 million in a deal announced in late 2013.

Dallas-based Kainos Capital describes Milk Specialties as a pioneer in developing nutritional ingredients. The company provides whey-based products for the sport nutrition and lifestyle industries. Its animal nutrition unit supplies fats, proteins and carbohydrates for livestock producers worldwide.

Kainos Capital, a middle-market private equity firm focused on the food and consumer sector, is led by Andrew Rosen, Robert Sperry and Sarah Ashmore Bradley. Rosen is managing partner, while Sperry and Bradley hold the title of partner. Other executives include Daniel Hopkin, principal, Nirav Shah, principal, and Dave Knickel, chief financial officer. John Muse, co-founder of Hicks, Muse, Tate & Furst, serves as non-executive chairman of Kainos Capital.

In a high-profile deal announced last summer, Kainos Capital acquired Slim-Fast from Unilever for an undisclosed sum. Unilever held onto a minority stake.