Darling Ingredients (DAR) Outlook Lowered to Negative by Moody's

Moody's Investors Service (Moody's) today affirmed the Corporate Family Rating (CFR) of Darling Ingredients (NYSE: DAR), but changed the rating outlook to negative from stable. Moody's also changed several other of Darling's ratings in connection with the issuance of new debt which changes the overall secured/unsecured mix within the company's capital structure. As such, Moody's upgraded Darling's senior secured bank credit facilities to Ba1 from Ba2 and senior unsecured debt to Ba3 from B1.

Moody's also assigned a Ba3 rating to Darling Global Finance B.V.'s (a wholly owned, indirect subsidiary of Darling) proposed €515 million senior unsecured notes. Moody's also lowered Darling's Speculative Grade Rating (SGL) to SGL-2 from SGL-1.

"The negative outlook reflects the material volatility and weakness in Darling's operating performance, its moderately high financial leverage, and the possibility of a ratings downgrade if earnings do not improve" said Dominick D'Ascoli, a Vice President and Senior Analyst at Moody's.

Darling's earnings and cash flow have exhibited a greater degree of volatility than Moody's had previously expected. A significant contributor to recent volatility and weaker performance has been a material decline in corn and fat prices. EBITDA is well below prior expectations and debt to EBITDA has increased to 4.6 times for the twelve months ended April 4, 2015.

The Speculative Grade Rating was lowered to SGL-2 from SGL-1 because of modest cushion under the total leverage financial covenant contained in the company's credit agreement. This covenant was recently amended so that it remains at 5.0 times and no longer steps down. Moody's believes that the amount of debt the company can borrow under the revolving credit facility while remaining in compliance with this covenant will be meaningfully restricted over the next year. Nevertheless, Moody's expect availability to be sufficient to meet operating needs.

Darling announced that it will issue €515 million in senior unsecured notes at its indirect, wholly-owned subsidiary Darling Global Finance B.V. and that the notes will be guaranteed by the same entities that currently guarantee the existing 5.375% senior unsecured notes due 2022, including Darling Ingredients Inc. Proceeds from the note offering will be used to repay the euro denominated portion of its senior secured term loan B. The repayment of senior secured debt enhances recovery prospects of the remaining senior secured debt because there is less senior debt to satisfy from the value of the collateral. The upgrade to senior secured ratings and senior unsecured ratings is contingent upon successful completion of the note offering and repayment of the euro denominated term loan B facility. Moody's will withdraw the rating on the euro denominated term loan B upon its repayment.

Ratings Assigned:

Darling Global Finance B.V.

- €515 million senior unsecured notes due 2022 at Ba3 (LGD 5)

Ratings Affirmed:

Darling Ingredients Inc.

- Corporate Family Rating at Ba2

- Probability of Default Rating at Ba2-PD

- $700 million euro denominated senior secured term loan B at Ba2 (LGD 3)

Ratings Lowered:

Darling Ingredients Inc.

- Speculative Grade Liquidity Rating to SGL-2 from SGL-1

Ratings Upgraded:

Darling Ingredients Inc.

- $1,000 million senior secured revolving credit facility to Ba1 (LGD 3) from Ba2 (LGD 3)

- $350 million senior secured term loan A to Ba1 (LGD 3) from Ba2 (LGD 3)

- $600 million senior secured term loan B to Ba1 (LGD 3) from Ba2 (LGD 3)

- $700 million euro denominated senior secured term loan B to Ba1 (LGD 3) from Ba2 (LGD 3)

- $500 million senior unsecured notes due 2022 to Ba3 (LGD 5) from B1 (LGD 6)

The outlook on all ratings is negative.

Ratings Rationale

Darling's Ba2 Corporate Family Rating reflects moderately high financial leverage and exposure to earnings and cash flow volatility from commodity price swings. It also reflects exogenous raw material supply risks from animal disease, government regulations, and trade restrictions. The rating also reflects good profitability, good geographic and end market diversity, and the use of raw material pricing formulas that help reduce volatility in a portion of its business.

The ratings could be lowered if earnings do not improve or liquidity deteriorates. Moody's could also downgrade the ratings if it expects debt to EBITDA to exceed 4.5 times on a sustained basis.

The rating could be upgraded if Darling is able to improve credit metrics. Specifically, the company would need to take measures to reduce volatility in its earnings and cash flow, and sustain debt to EBITDA below 3.5 times.

The principal methodology used in this rating was Global Protein and Agriculture Industry published in May 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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