Moody's Affirms Ratings of Treehouse Foods (THS) Following Review on Flagstone Foods Purchase

Moody's Investors Service confirmed the credit ratings of Treehouse Foods (NYSE: THS) including the Ba2 Corporate Family Rating ("CFR"), the Ba2-PD Probability of Default Rating ("PDR"), the Ba2 senior unsecured debt instrument rating and the (P)Ba2 senior unsecured shelf rating. Moody's also affirmed the company's Speculative Grade Liquidity rating at SGL-2.

This action concludes the rating review for downgrade that commenced on July 1, 2014 following the company's announcement of its intent to purchase Flagstone Foods, Inc. ("Flagstone"), a producer of private label nuts, trail mix and dried fruit snacks, from private equity firm Gryphon Investors ("Gryphon") and other shareholders for approximately $860 million. The company completed the acquisition of Flagstone on July 29, 2014.

RATING RATIONALE

The ratings confirmation reflects our expectation that higher financial leverage that resulted from the Flagstone acquisition will likely decline to below pre-acquisition levels in less than a year, owing in part to the successful issuance of common equity that financed over 40% of the purchase price and the solid earnings growth of Flagstone and other acquired businesses that we expect to be sustained for the foreseeable future. These positive trends are partially offset by the rising risk profile of TreeHouse's acquisition strategy that has shifted recently to include a faster pace and larger size of transactions, a wider range of acquisition targets, and a willingness to pay higher valuation multiples.

The Flagstone acquisition -- the largest acquisition in TreeHouse's history -- came on the heels of the $150 million acquisition in May of Protenergy Natural Foods ("Protenergy"), an Ontario-based manufacturer of private label broth, soups and gravys. We estimate that the EBITDA multiple paid in each of these acquisitions was more than 10 times, compared to the 7-8 times TreeHouse was paying just a few years ago, which reflects declining financing costs and rising competition from other bidders. As a result, while TreeHouse continues to make attractive acqusitions of private label food companies, we believe that it has begun to take on more risk than before in order to achieve its return objectives.

Moody's has taken the following rating actions on TreeHouse Foods, Inc.:

Ratings confirmed:

Corporate Family Rating at Ba2;

Probability of Default Rating at Ba2-PD;

$400 million 4.875% senior unsecured notes due 2022 at Ba2, LGD4;

Senior unsecured shelf at (P)Ba2.

Ratings affirmed:

Speculative Grade Liquidity Rating at SGL-2.

TreeHouse financed the $860 million Flagstone acquisition through a combination of approximately $330 million of borrowings under the company's $900 million revolving credit facility (unrated), a new $200 million Term Loan A (unrated), and a common stock offering that netted approximately $358 million.

TreeHouse plans to leverage Flagstone's success in converting center-of-store offerings to perimeter-located products, which tend to carry higher margins. Consumers are willing to pay a premium for fresh produce and healthy foods sold on grocery store perimeters making it among the more profitable areas of the store for food retailers and vendors. When the Flagstone was formed by Gryphon in 2010, its product portfolio was comprised mostly of traditional shelf-stable private label nuts, and dried fruits. The company has since expanded its manufacturing capabilities to offer higher-margin premium private label snacks located in the fresh produce section, which has been a key driver of Flagstone's double-digit sales growth.

Moody's estimates that pro forma debt/EBITDA, after Moody's adjustments and including the Flagstone and Protenergy acquisitions, is approximately 4.0 times

A rating downgrade could occur if TreeHouse's core operating performance deteriorates, the integration of an acquisition becomes problematic, or financial policy turns more aggressive. Quantitatively, if debt/EBITDA is sustained above 3.5 times EBITDA, retained cash flow to net debt falls below 16%, or the company's earnings cushion against bank covenants falls below 10%, a downgrade could occur.

Given TreeHouse's relatively small size and its growth-by-acquisition strategy, an upgrade is unlikely in the near-term. We expect TreeHouse's credit profile to strengthen over time through the successful execution of its growth strategy, stable performance in core operations, and the continued balanced use of debt and equity to finance acquisitions. We could upgrade the ratings if the company significantly and profitably grows its scale and is able to sustain debt/EBITDA below 3.0 times.

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