S&P Upgrades Blue Buffalo Pet Products (BUFF) to 'BB-'; Notes Reduction in Sponsor Control

S&P Global Ratings raised its corporate credit rating on Blue Buffalo Co. LTD. (Nasdaq: BUFF) to 'BB-' from 'B+'. The outlook is stable.

At the same time, we assigned our 'BB-' corporate credit rating to the publicly traded parent company, Blue Buffalo Pet Products Inc. The outlook is stable.

At the same time, we raised our issue-level ratings on the company's senior secured credit facilities (composed of a $40 million revolving credit facility due August 2017 and a $400 million term loan B due August 2019) to 'BB+' from 'BB' as a result of the upgrade. The recovery ratings on this debt remains '1', indicating our expectations for very high (90%-100%) recovery in the event of a payment default.

As of March 31, 2016 the company had $400 million of adjusted debt.

"The upgrade reflects the financial sponsor's reduced control of Blue Buffalo through secondary stock sales and our expectation that debt to EBITDA will be sustained below 4x," said S&P Global Ratings analyst Amanda Cusumano. "It also incorporates the company's continued strong financial performance, illustrated by double-digit revenue growth and EBITDA margins over 20%."

The company remains majority owned by financial sponsor Invus Group, which still constrains our assessment of the company's financial profile. However, S&P Global Ratings expects Invus to continue to reduce its ownership over time. "We view the company's increasing independence positively because management and the board will have greater control of financial policies going forward, which we view as generally less aggressive than a majority financial sponsor ownership," said Ms. Cusumano.

The stable outlook reflects our expectation for the company to maintain debt to EBITDA below 4x over the next 12 months, and that Invus Group will sustain its ownership stake in the company above 40%. We estimate revenue will grow in the low double-digits for the full year 2016, and the EBITDA margins will continue to be over 20%.

We could raise the ratings if Invus Group reduces its majority ownership stake in the company to below 40% and we no longer consider the company to be financial-sponsored owned, and if it manages leverage below 3x. Additionally, if the company achieves greater geographic, customer, and product diversification we could consider raising the ratings.

We could lower the ratings if the company demonstrates more aggressive financial policies, potentially through a debt-financed share repurchase, dividends, or acquisitions, and we come to expect it to maintain debt to EBITDA over 4x. A loss of market share in the wholesome and natural category from increased competition from larger peers, or a product recall that results in deteriorating operating results, could also weigh negatively on the ratings. An unfavorable ruling to outstanding litigation that erodes brand equity or imposes changes to the company's products would also result in a
downgrade.

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