DBRS Places AGT Food and Ingredients Inc. Under Review with Developing Implications

DBRS Limited (DBRS) placed AGT Food and Ingredients Inc.’s (AGT or the Company) Issuer Rating of B (high) and Senior Unsecured Notes rating of BB (low), with a recovery rating of RR3, Under Review with Developing Implications. The rating actions follow the announcement by AGT on July 26, 2018, that the Company received a non-binding proposal from a group comprised of certain members of its management group, led by President and Chief Executive Officer, Murad Al-Katib (the Management Group), to privatize AGT (the Proposed Transaction).

Under the Proposed Transaction, the Management Group would acquire all issued and outstanding common shares of AGT other than those held by management and certain other significant shareholders (including Fairfax Financial Holdings Limited (rated BBB (high) with a Stable trend by DBRS) and Point North Capital Inc.) for consideration of $18 per share. The Proposed Transaction is subject to legal and compliance conditions and would be completed by way of a plan of arrangement after approval at a special meeting of shareholders of the Company. AGT’s board of directors will establish a committee of independent directors to consider and respond to the Proposed Transaction. DBRS notes that AGT has stated there is no set timetable with respect to the review of the independent committee.

The Under Review with Developing Implications status reflects the uncertainty over the likelihood that a transaction would move forward and, if it does, the ultimate consideration paid, the method of financing and future strategic and financial management intentions.

DBRS notes that although the offer to take AGT private is for AGT’s common shares, any such transaction is likely to trigger change-of-control provisions in AGT’s Senior Unsecured Notes, which would require that an offer be made to repurchase at a price equal to 101% of the outstanding Senior Unsecured Notes of the Company.

On March 29, 2018, the trend on AGT’s Issuer Rating of B (high) and Senior Unsecured Notes rating of BB (low), with a recovery rating of RR3, was changed to Negative from Stable. The Negative trend reflected significantly weaker-than-anticipated earnings in 2017 (H2 2017 in particular) and the related use of incremental debt to fund the shortfall in cash for capital investments and working capital. The Company’s earnings were negatively affected by volatility in pulse markets caused by oversupply, which was driven by strong production, including in traditional import markets. This strong production in traditional import markets resulted in declining domestic prices in India and the imposition of tariff and non-tariff trade barriers by India to help support local pulse prices.

DBRS will proceed with its review as more information becomes available.

AGT’s ratings are based on its niche position in staple foods; favourable underlying industry trends and demographics; solid geographic, supplier and customer diversification; and the benefits of vertical integration. The ratings also reflect the volatility in input costs and sensitivity to the impact of weather, the low margin and capital-intensive nature of the legacy business, competition and the commodity-nature of most products and risks associated with the Company’s ambitions for growth.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodologies are Rating Companies in the Consumer Products Industry, DBRS Criteria: Recovery Ratings for Non-Investment Grade Corporate Issuers, DBRS Criteria: Guarantees and Other Forms of Support and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers, which can be found on dbrs.com under Methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.