OREANDA-NEWS. Fitch Ratings has placed Findus Pledgeco S.a.r.l's (Findus) 'B-' Long-term Issuer Default Rating (IDR) on Rating Watch Evolving (RWE). At the same time, the 'B+'/'RR2' rating on Findus BondCo S.A.'s senior secured notes have also been placed on RWE.

In addition, Findus PIK S.C.A. (holdco)'s IDR of 'CCC' IDR and its EUR200m 8.25%/9% senior PIK notes at 'CC'/'RR6' have been placed on RWE.

The RWE reflects the range of possible outcomes of the announced option agreement under which Nomad Foods Limited (Nomad) will acquire Findus' continental European business for GBP500m. The financial structure of the transaction is unclear at this stage, given the uncertainty on the application of the sale proceeds. It is currently unknown whether all or part of the proceeds will be used to refinance existing senior secured debt at the Findus Pledgeco restricted group level totalling GBP367m as at 27 June 2015 (3Q15) and whether the GBP148.7m PIK notes at holdco level would be refinanced into the restricted group level.

The transaction will leave Findus with a smaller UK-only business in a challenging trading environment. If the transaction is completed without leaving the remaining UK business highly leveraged and is accompanied by a mildly improved financial profile the IDR may be affirmed.

KEY RATING DRIVERS

Pending Transaction
Nomad has entered into a binding offer through an option agreement to acquire Findus' continental European business in Sweden, Norway, Finland, Denmark, France, Spain and Belgium. Nomad will pay GBP400m in cash and GBP100m in shares. The transaction is expected to be completed in 4Q15, subject to regulatory approvals. Findus will be left with an UK-only business with sales of GBP590.5m and EBITDA of GBP38.8m in 2014, around half the size of the business pre-disposal.

Rating Affirmation Most Likely
We assume the most likely scenario is for Findus to repay most or all of its debt at the Findus restricted group level and refinance the PIK notes as senior debt at the restricted group level. This level of debt, combined with a smaller funds from operations (FFO) generation from an UK-only business could result in a FFO adjusted gross leverage of 5.5x-6x. Such a leverage profile, combined with a strong UK business profile with leading market shares but constrained by high customer concentration, should continue to support a 'B-' IDR.

Limited Upgrade Potential
If the transaction is completed and most of the sales proceeds are used to repay most of the existing senior secured debt at the restricted group level this could result in an upgrade of Findus's IDR by one notch on the basis of potentially low financial leverage at Findus restricted group level.

An upgrade is also subject to the underlying performance and growth prospects of the remaining UK business (particularly given its recent loss of the Sainsbury's chilled salmon contract) provided the PIK notes remain at holdco level and retain their equity-like characteristics or do not constrain Findus's financial flexibility if holdco elects to pay cash interest.

Limited Downgrade Risk
If however, the transaction completes with only partial or no meaningful debt reduction at Findus restricted group level, Findus' weakened financial and business profile stemming from the lack of geographical diversification and smaller size could result in a downgrade. Although possible, this scenario is unlikely given Findus' ambition to retain a clear leadership position in the UK, especially in a growing chilled market. High leverage would hinder the group's ambition and growth prospects.

The RWE will be resolved once the financial structure of Findus is made known post transaction with details on the use of the sale proceeds.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
-Completion of the disposal of Findus' continental European business no later than January 2016
-All or part of the sales proceeds to be used to refinance existing senior secured debt at Findus restricted group
-All or part of the PIK notes to be refinanced into the restricted group level

RATING SENSITIVITIES
Negative: Future developments that could, individually or collectively, lead to negative rating actions include:
-The remaining UK business undermined by high execution risks and by highly volatile or constantly negative free cash flow (FCF)
-FFO adjusted gross leverage at or above 6x

Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
-The remaining UK business showing signs of sustainability with moderate execution risks and neutral to positive FCF
-FFO adjusted gross leverage at or below 4x