Moody’s Investors Service downgraded the ratings of Flamingo Group International Limited (Flamingo or the company), including its corporate family rating (CFR) to Caa1 from B3; its probability of default rating to Caa1-PD from B3-PD, and its backed senior secured bank credit facility rating to Caa1 from B3. Concurrently, Moody’s has also changed the company’s outlook to negative from ratings under review.
The following factors drove these rating actions, which conclude the review initiated on 21 February 2023:
– Weak liquidity, with its revolving credit facility (RCF) currently drawn by €18 million maturing in February 2024 and Moody’s expectations of negative free cash flow (FCF) generation over the next 18 months
– Soft operating performance over the last 12 months to March 2023, driven by a challenging trading environment including unfavourable sales mix changes, loss of significant contracts with retailers and weather-related reductions in production output
– Increasing refinancing risk on the current capital structure, which comprises the RCF (maturing in February 2024) and the term loan B maturing in February 2025
A full list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
The downgrade of Flamingo’s CFR to Caa1 from B3 reflects the company’s approaching debt maturities, deteriorating operating performance and weak liquidity. Moody’s views the £24 million of cash at the end of March 2023 (proforma for a €12 million repayment on the RCF) which comprises the company’s total sources of liquidity as insufficient to meet the company’s liquidity needs after Q1 2024, when the RCF matures and the semi-annual interest payment takes place. The rating agency also expects that free cash flow (FCF) will be materially negative in 2023 driven by lower EBITDA levels and higher interest costs in 2023 due to the increase in reference rates, putting further pressure on the company’s already weak liquidity.
Governance considerations were an important driver of today’s rating actions, as the relatively late timing in addressing liquidity and maturity risk has weakened the credit quality of Flamingo.
Flamingo’s revenue and EBITDA generation have also continued to deteriorate during the first three months of 2023 following an already challenging financial year of 2022. Revenue and Company-reported EBITDA have respectively decreased by 12% and 31% in Q1 2023 relative to the same period in the previous year, driven by the loss of significant contracts in the UK and Continental Europe, decreased demand in the more profitable Home Delivery channel and weather-related events which resulted in reduced production output. Although there were positive developments in the month of March within the Produce and UK Flowers segments, Moody’s considers that there are significant risks to Flamingo’s operating performance given the discretionary nature of most of its products and the current pressures on disposable income in its largest markets. As a result, Flamingo’s liquidity profile could weaken further and its Moody’s-adjusted Debt/EBITDA at year-end 2023 could increase materially beyond the current level of 6.3x as of the LTM period ending in March 2023.
Moody considers that the combination of weak ongoing operating performance and cash flow generation with approaching material debt maturities in 2024 and 2025 have resulted in increasing material levels of refinancing risk.
Flamingo’s product concentration (flowers generate over 65% of revenue), its vulnerability to weather and crop disease risk, and its concentrated third-party supplier base and customer base remain key constraints on its credit quality. The fact that a significant portion of the company’s production facilities is located in Ethiopia (Government of Ethiopia, Caa2 negative) also exposes the company to a risk of supply chain disruption, although this is mitigated by the location of Flamingo farms within Ethiopia and the signing of the Tigray truce agreement in November 2022.
Flamingo’s Caa1 CFR also benefits from the company’s strong market position within certain segments of the business, albeit in narrow product categories, supported by the company’s cost advantage in sweetheart roses production, and a degree of vertical integration that combines Flamingo’s own production with third-party sourcing enabling it to meet fluctuations in demand.
ESG CONSIDERATIONS
Additional governance factors that Moody’s considers in Flamingo’s credit profile are the quality of the financial information provided to lenders, its concentrated ownership and its board structure. Weak internal controls are also an important governance consideration, although these have been strengthened following an accounting misstatements incident earlier this year.
Key environmental risks for Flamingo include its exposure to physical climate risk due to its concentration of sourcing from the Government of Kenya (Kenya, B3 ratings under review) and Ethiopia and risks related to water management, waste and pollution. The company also relies on natural capital in relation to key production inputs. At the same time, we also note that sustainable production is high on the company’s agenda as illustrated by Flamingo’s usage of biological pest control and water efficiency initiatives in Kenya.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Flamingo’s approaching debt maturities, and weakened liquidity profile, as well as the challenging operating environment which could have an impact on the company’s ability to refinance its RCF (February 2024) and €280 million backed senior secured term loan B (February 2025) maturities.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade is unlikely at this point. Moody’s could upgrade the ratings if the company (i) successfully refinances its upcoming maturities, and (ii) maintains an adequate liquidity profile, and (iii) operating performance improves such that EBITDA generation approaches 2022 levels with sustainably improved profitability, and (iv) achieves positive free cash flow generation, and (v) EBITA/Interest coverage is sustainably above 1.0x.
Conversely, the ratings could be downgraded if (i) revenue or profits continue to decline; (ii) free cash flow remains materially negative; or (iii) the company is not likely to be able to refinance its term loan and revolver facilities, increasing the likelihood of debt restructuring or default.
