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Boparan Holdings has credit rating downgraded

Credit agency Moody’s has downgraded Boparan Holdings rating from B2 to B3, with a negative outlook, in light of its latest full year results

Parent company of 2 Sisiters Food Group

Boparan Holdings, the parent company of 2 Sisters Food Group, posted a total loss of £37.7m in 2016/17, compared with a loss of £1.4m the previous year.

The change was driven by lower profit margins reported in the financial figures covering the 12 months to the end of July as well as what Moody’s considers “limited prospects for material recovery” in the following period.

It suggests that this will lead to high leverage, thin margins and “weak to slightly negative cash flow generation”.

Refinancing risk

Boparan Holdings issued a £250m bond that expires in July 2019. Moody’s said there could be a refinancing risk if operational performance did not improve in the period before this note was due.

While Boparan said it was undertaking measures to improve both profitability and cash flow generation, high input costs – as well as a higher living wage and competitive pressure – would limit improvement, according to Moody’s.

Strengthening quality control places further pressure on margins

The report adds: “Additional measures to strengthen quality control following the recent hygiene failings allegations will also further pressure already thin margins.”

The agency concedes that it expects capital expenditure to reduce given that 2 major refurbishment projects have concluded at 2 Sisters’ Scunthorpe and Derby sites.

Brighter prospects for poultry division

It also considers the prospects for the poultry division brighter, explaining that 70% of poultry sales benefit from “contractual pass through arrangements” for inputs.

Moody’s analyst Eric Kang said: "The downgrade of Boparan's ratings to B3 with a negative outlook is driven by the lower EBITDA in the last fiscal year 2016-17 as well as limited prospects of a material recovery in the next 12 months, which would result in a sustained high financial leverage, thin margins and weak to slightly negative free cash flow generation.

“There could also be refinancing risk with respect to the GBP250 million senior notes due in July 2019 if operating performance and credit metrics do not improve.”

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