S&P Downgrades AgroFresh (AGFS) to 'B'; Outlook is Stable

S&P Global Ratings lowered its corporate credit rating on AgroFresh (Nasdaq: AGFS) to 'B' from 'B+'. The outlook is stable.

In addition, we lowered the rating on the company's $425 million first-lien term loan and $25 million revolving credit facility to 'B+' from 'BB-'. The recovery rating remains '2', indicating our expectation for substantial (in the lower half of the 70% to 90% range) recovery in the event of a payment default.

"The downgrade reflects our view of risks to the company's credit quality arising from a weaker-than-expected apple crop, potential competitive dynamics, as well as modestly weaker credit metrics," said S&P Global Ratings credit analyst Michael McConnell.

Earnings in 2015 and our forecast for 2016 have been lower than our prior expectations, which have led to a drop in the credit measures. Specifically, the key ratio of funds from operations (FFO) to total debt is now expected to remain below 12% over at least the next year, which compares unfavorably with our previous expectation that this metric would be in the low- to mid-teens percentage area. Adverse weather conditions have been a primary driver in the weaker performance due to effects on the global apple crop, which drives an overwhelming majority of the company's revenues and EBITDA.

The stable outlook reflects our expectation that the company will maintain its good market position and operating performance in the highly niche post-harvest food preservation industry. We expect near-to-mid-term patent expirations and new entrants to the market to remain key risk factors, and would expect the company to try to partially offset this through investment in innovation and acquisitions. We expect that over the next 12 months the company will sustain FFO to debt in the upper-single-digit percent area and that liquidity will remain adequate.

We could lower the rating if the company experiences weakening credit metrics resulting from continued adverse weather conditions, or a decline in market share or pricing due to increased competition. We could consider a downgrade within the next 12 months if those conditions led to a decline in revenue of 5% and a 600 basis point decline in EBITDA margins, resulting in FFO to debt deteriorating below 6% on a sustained basis. We could also lower the rating if, against our current expectation, the company pursues large debt-funded acquisitions, or a change in financial policy that increases shareholder rewards.

We could consider an upgrade within the next 12 months if the company is able to improve FFO to debt above 12%, and we believe this improvement will be sustained. This could occur if the company's earnings and cash flows are stronger than we project, or if it commits to significant debt reduction, in the absence of acquisition opportunities. Alternatively, we could view an acquisition funded with equity, such that acquired EBITDA effectively reduces leverage, as a positive credit factor.

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