(Bloomberg) -- S&P Global Ratings downgraded the parent company of Lipton Teas and Infusions deeper into junk, flagging weaker-than-anticipated performance from the tea manufacturer.
The ratings firm forecasts Lipton will continue to post negative free operating cash flow through 2025 due to a combination of factors, including the delisting of certain products, rising overhead costs and increased competition. The company is also facing a “substantial” cash burden of over €300 million ($335 million) a year for interest payments and capital investments, S&P said in a note Tuesday.
“Under our base case, key credit metrics for 2024 are thus significantly weaker than our previous expectations,” analysts including Celine Huang said in the note, which cut Cuppa Bidco BV from B- to CCC+.
CVC Capital Partners bought Lipton Teas, whose brands include PG Tips and Pukka, from Unilever Plc in a €4.5 billion deal announced in 2021. At the time, banks ended up offloading some of the debt used to finance the buyout at a discount after markets were roiled by higher interest rates and geopolitical uncertainty, Bloomberg News previously reported.
High working capital needs as well as costs have prompted Lipton to draw on its revolving-credit facility, leaving €325 million remaining as of June, S&P said. That provides the company with “limited flexibility” under the debt facility, which has a springing covenant that comes into play if Lipton taps its revolver again.
“We could lower the ratings in the next 12 months if Lipton’s liquidity position weakens further, such as through a financial covenant breach,” the analysts wrote.
However, for Lipton, there is little in the way of near-term refinancing risks. The company’s €1.75 billion term loan as well as its £438 million ($587 million) term loan only come due in June 2029.
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