S&P upgrades Hostess Brands

S&P said it raised its ratings on Hostess Brands Inc.’s issuer rating to BB- from B+ and its senior secured facilities to BB from BB-. The recovery rating on the senior secured debt remains 2, reflecting an estimate of substantial (70%-90%; rounded estimate: 75%) recovery in default.

“The upgrade reflects Hostess' strong operating performance and lower debt leverage. During the third fiscal quarter ended Sept. 30, 2022, Hostess’ revenues grew 20.2%, driven by 20% price mix improvements while volumes remained flat. S&P Global Ratings-adjusted EBITDA grew over 18% during the third fiscal quarter compared with the same prior-year period, resulting in net leverage of 3.5x (We include tax receivable agreement obligations in our leverage calculations for Hostess, raising leverage about 0.5x.), improved from 4x in the prior period,” S&P said in a press release.

The agency said it estimates sales of more than $1.4 billion in 2023 and EBITDA to continue growing in fiscal 2023, though at a slower rate than in 2022, and estimate EBITDA margins will narrow to about 21.5% in fiscal 2023 from about 22% in fiscal 2022.

“The slower growth in 2023 reflects our expectations for lower price increases and modest price elasticities. The lower EBITDA margin forecast incorporates our expectation of higher marketing and advertising spend to support new product introductions,” S&P said.

The outlook is stable.

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