Premier Foods: agrees 167 million GBP swap restructure

London / UK. (pf) In August, British 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 now 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 167 million GBP 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 450 million GBP. In return for agreeing to pay the current mark to market cost of 167 million GBP, 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 151 million GBP gross of tax as at the end of June 2010. At the time of restructuring the swaps, the negative value had become 167 million GBP. The agreement the company has reached turns 47 million GBP of this element into an economic hedge and removes the risk on the remaining 120 million GBP 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, eight million GBP will be paid in 2010, 33 million GBP will be paid in 2012 and the remaining 79 million GBP 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 1’075 million GBP of bank debt to 6,2 percent.

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: «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».