S&P Assigns 'B' L-T Corp. Rating to SunOpta (STKL); Views Financial Risk Profile as 'Aggressive'

Standard & Poor's Ratings Services said it assigned its 'B' long-term corporate credit rating and stable outlook to SunOpta Inc. (Nasdaq: STKL).

SunOpta is proposing a US$450 million acquisition of Sunrise Growers Inc., financed with US$100 million of common equity, and US$330 million of senior secured second-lien notes.

As a result, we are also assigning our 'B' issue-level rating, and '4' recovery rating to the company's US$330 million senior secured second lien notes due 2022. The '4' recovery rating indicates our expectation of average (30% to 50%; upper half of the range) recovery, in the event of default.

"The ratings on SunOpta reflect what we view as the company's weak business risk profile, characterized by the company's position within the relatively small but fast-growing industry of sourcing, processing, and packaging of organic and non-GMO grains and fruit ingredients," said Standard & Poor's credit analyst Donald Marleau.

Our view of the company's financial risk profile as "aggressive" incorporates pro forma debt leverage of 5.0x-5.5x after giving effect to the largely debt-financed Sunrise acquisition in late 2015. Our key operating and financial metrics exclude the company's Opta Minerals Inc. subsidiary, which has nonrecourse financing and which we view as noncore.

We assess SunOpta's business risk profile as "weak," owing to the company's limited competitive advantage as a small producer in the fragmented global ingredients industry, which is counterbalanced by the attractive growth prospects of its focus area in organic, non-GMO food products. SunOpta's business segments include the global sourcing of ingredients for resale, a portion of which also supplies the company's consumer products segments that makes on-trend healthy beverages, frozen fruit, and snacks, and sells inputs and consumer products to larger food manufacturers, retailers, and foodservice companies. The acquisition of Sunrise will add a leading provider of frozen fruit (predominantly strawberries) that serves private-label retail and food service.

The stable outlook is predicated on SunOpta's integration of the Sunrise acquisition, which we believe should boost margins and push leverage below 5x in 2016.

We could lower the rating if SunOpta's EBITDA interest coverage deteriorated to below 2x, which we believe would expose the company to potentially higher debt levels for working capital swings and weaker liquidity. Considering the low fixed-asset intensity of its business and low capital expenditure requirements, we believe that such a scenario would incorporate adjusted EBITDA margins below 5%, indicating weak performance in its core operations or problems integrating acquisitions.

We could raise our rating on SunOpta if the company integrates the Sunrise acquisition, such that leverage drops below 4x. We believe that such a scenario would be consistent with higher adjusted EBITDA margins of about 9%, as well as some free cash flow for debt reduction after working capital investments.

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