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Rating Action:

Moody's assigns provisional (P)B2 and (P)Caa2 instrument ratings to Clondalkin's refinancing package, outlook positive

Global Credit Research - 08 May 2013

B3 CFR affirmed and PDR upgraded to B3-PD

Frankfurt am Main, May 08, 2013 -- Moody's Investors Service has today affirmed the B3 corporate family rating (CFR) of Clondalkin Industries B.V. (Clondalkin) and upgraded the group's probability of default rating to B3-PD from Caa1-PD. Subsequently, the rating agency has assigned a provisional (P)B2 rating to the proposed USD350 million 1st lien term loan and a provisional (P)Caa2 rating to the proposed USD105 million 2nd lien term loan to be issued by Clondalkin Acquisition B.V. The outlook on the ratings has been changed to positive from negative.

The rating action is based on our assumption of a successful placement of the proposed term loans. Failure in doing so would result in significant downgrade pressure on Clondalkin's ratings due to the then unsolved refinancing of upcoming debt maturities.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from the provisional rating.

RATINGS RATIONALE

"The affirmation of Clondalkin's CFR of B3 reflects the group's implementation of adjustments to its financing structure, which, should the proposed term loans be successfully placed, removes significant refinancing risk," says Anke Rindermann, Moody's lead analyst for Clondalkin. At the same time, we note that pro forma for the refinancing, leverage will remain elevated at above 6x Debt/EBITDA as adjusted by Moody's, including the new securitization facility. The upgrade of the Probability of Default rating by one notch to B3-PD from Caa1-PD acknowledges that the company has significantly reduced default risk if the refinancing is implemented as currently proposed.

More fundamentally, the rating recognises Clondalkin's solid business profile, especially its diversified product portfolio with an increasing focus on higher margin specialty products. While recent disposals have reduced Clondalkin's scale and diversification, it allows the group to focus on its higher margin, less commoditized secondary pharma packaging business. At the same time, we caution that volatile input costs will remain a potential risk factor for Clondalkin, considering that the group can pass on higher costs only with a time lag of several months.

The positive outlook reflects our expectation of gradually improving credit metrics on the back of lower restructuring charges which should allow Clondalkin to improve its EBITDA margin to around 10%, and continued positive though moderate free cash flow generation, both of which should help reducing its leverage to around or below 6x over the next 12 months.

Following the proposed refinancing, we anticipate that Clondalkin's liquidity profile will be solid. Internal sources include cash on hand of EUR32 million pro forma for the refinancing. In addition, we note that Clondalkin will have access to a new revolving credit facility amounting to USD35 million as well as to a new EUR70 million multi-year securitization agreement.

These sources should be sufficient to fund working cash requirements, estimated at around 3% of sales, as well as capex forecasted at around EUR25 million per year, with the RCF in place to support seasonal working capital swings. We expect Clondalkin to continue to generate positive, albeit modest amounts of free cash flows. The rating is based on our expectation of Clondalkin retaining solid headroom under its financial covenant.

Upwards pressure could build should Clondalkin manage to materially reduce leverage to clearly below 6 times on a sustainable basis on the back of improvements in operating profitability. Furthermore, the rating could enjoy upwards pressure were Clondalkin to improve free cash flow generation towards 5% of total debt and interest cover towards 1.5 times.

The rating could be downgraded should Clondalkin's profitabilty deteriorate materially, such as for example on the back of higher input costs that the group might not be able to recover. Quantitatively, Moody's would consider downgrading Clondalkin's rating if its EBITDA margin were to decline below the high single digit percentages, with its leverage increasing to materially above 7x Debt/EBITDA. Also, a weakening liquidity profile including incurrence of materially negative free cash flow would put pressure on the rating.

The (P)B2 rating for the first lien term loan due 2020is one notch above the B3 CFR and reflects the preferential ranking of the loan in the overall debt structure with no priority debt ranking ahead and a security package that encompasses upstream guarantees from all material operating companies and an essentially all asset pledge, shared equally with lenders under revolving credit facility. The (P)Caa2 rating of the second lien term loan due 2020 is two notches below the group rating, reflecting the sizeable amount of secured debt and structurally preferred obligations ranking ahead of the second lien facility.

The principal methodology used in these ratings was the Global Packaging Manufacturers: Metal, Glass, and Plastic Containers published in June 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Clondalkin is among the leading converters for a number of niche packaging products. In the last twelve months ending March 2013, the company recorded sales of EUR695 million (pro forma for disposals), which were generated in Europe (69%), North America (27%) and other countries (4%). Clondalkin Industries B.V., which is owned by Warburg Pincus Funds and management, is domiciled in Amsterdam, Netherlands.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Anke Rindermann
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Matthias Hellstern
Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns provisional (P)B2 and (P)Caa2 instrument ratings to Clondalkin's refinancing package, outlook positive
No Related Data.

 

© 2013 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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