Leveraged Loans: S&P cuts rating at Catterton’s Ferrara Candy

  • Ferrara Candy, founded 1908, backed by L Catterton
  • Current leverage 11x, adjusted 8.5x: S&P estimate
  • S&P cut rating 1 notch; upgrade would require pared leverage

Standard & Poor’s pared the rating for Ferrara Candy Co, producer of some iconic brands including Chuckles, Jujyfruits, Now & Later and Red Hots.

The credit-rating firm cut the corporate rating on the L Catterton-backed candy maker to B- from B, citing “wholesale-pricing missteps” and some customers’ move to private-label products.

S&P made the same rating cut on Ferrara’s $535 million first-lien term loan maturing in 2023.

The outlook is stable since S&P analyst Stephanie Harter expects the Oakbrook Terrace, Illinois, company to “maintain adequate liquidity while improving its weak credit ratios, which are depressed by sizable one-time costs.”

At year-end 2016, the about 109-year-old candy company had about $815 million of total debt outstanding. S&P estimated Ferrara’s leverage at 11x, or an adjusted 8.5x excluding certain costs that may be one-time.

Also hurting Ferrara, Harter said, were challenges in its effort to scale its branded organic-candy platform. These “strained [Ferrara’s] capacity to fulfill customer orders,” she wrote.

Candy is a competitive business and conditions will be “tough” through the first half, the S&P analyst said in an April 11 report.

Ferrara might be able to reduce adjusted leverage in the second half, Harter said, but she tempered that likelihood because cash flow has recently been negative and the company has a history of posting “significant nonrecurring costs.” She expects cash flow to remain negative through the first half.

S&P could upgrade Ferrara if the company restores and sustains positive cash flow and keeps leverage at a maximum 7.5x. To do this, Harter said, Ferrara would need to boost EBITDA margins to the low teens while keeping capex in check.

Ferrara is led by Chief Executive Todd Siwak, who prior to joining the company was an operating partner at Catterton Partners. His background includes founding a producer of travel equipment and accessories, a medical-equipment producer and Mindseye Group, a PE firm focused on consumer and healthcare.

Catterton declined comment. Ferrara didn’t immediately return a call seeking comment.

Action Item: Contact the S&P analyst: stephanie.harter@spglobal.com

Image of Red Hots courtesy Ferrara Candy