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19 October 2010

Financial Strategy Update - Swap Restructure

Premier Foods has completed a swap restructure in line with its financial strategy

FINANCIAL STRATEGY UPDATE – SWAP RESTRUCTURE COMPLETED

19 October 2010

• An important step toward delivering a more stable financial structure
• A substantial reduction in risk and volatility in the balance sheet
• Opens the way to diversifying sources of funding

In August 2010, Premier Foods plc announced its financial strategy.  A key part of this strategy was to restructure and de-risk its interest rate swap portfolio.  Premier Foods plc is pleased to announce that, in line with this strategy, it has completed this restructuring. 

The restructuring achieves de-risking by considerably shortening the maturity of the portfolio, removing early termination options and eliminating the volatility of the digital swaps.  The cost of the restructured swaps is a gross cost of £167m in line with the current mark to market.  The Company has agreed a settlement profile of this amount between now and 2013 which the Company believes is affordable given its strong cash generation. 

Under the existing swap portfolio certain of the swaps had maturities extending to 2037 and a portion of the portfolio had the effect that, as interest rates fell, the interest cost of that portion increased without any offsetting reduction in the cost of the Company’s bank debt.  The swaps thus created an unhedged exposure to certain interest rate movements which could have cost the company up to £450m.  In return for agreeing to pay the current mark to market cost of £167m, the restructuring removes this risk. 

The portion of the swap portfolio which does not provide an economic hedge had a negative mark to market value of £151m gross of tax as at the end of June 2010.  At the time of restructuring the swaps, the negative value had become £167m.  The agreement the company has reached turns £47m of this element into an economic hedge and removes the risk on the remaining £120m by crystallising the mark to market at this level. 

The crystallised mark to market will be settled between now and 2013 when the bank facility is due for renewal.  Accordingly, £8m will be paid in 2010, £33m will be paid in 2012 and the remaining £79m will be become due at the end of 2013 and, in effect, will be refinanced at that time.  The settlement payments on the restructured swaps will attract tax relief as they are settled and are ignored for covenant purposes.  Covenant headroom remains ample.

The remaining swap portfolio provides an economic hedge to the company’s bank debt.  This hedge converts the floating interest rate on £1,075m of bank debt to 6.2%.

The de-risking achieved through the restructuring now facilitates the Company’s seeking a credit rating which, in turn opens up the possibility of raising funds in the bond market.  The Company intends to investigate this avenue as part of its strategy of diversifying its sources and maturities of funding. 

Jim Smart, Chief Financial Officer said:

“The restructuring of the swap portfolio is an important step in delivering a more stable financial structure.  Its successful completion removes a considerable amount of financial risk and volatility from our balance sheet.  This, together with the pensions changes announced in August 2010, achieves substantial progress towards the de-risking objective of our financial strategy and opens the way to diversifying our sources of funding.”

The full release is available below.

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For further information:

Maitland       +44 (0) 20 7379 5151
Neil Bennett
Emma Burdett
Brian Hudspith

 


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