MOODY'S ASSIGNS B2 RATING TO SENIOR NOTES ISSUE OF ZSC SPECIALTY CHEMICALS PLC.
Moody's Investors Service has assigned a B2 rating to the proposed senior unsecured $ 540 million notes issue of ZSC Specialty Chemicals plc and a "b3" rating to the œ 30 million in PIK preferred stock of ZSC Specialty Chemicals plc. The œ485 million secured term loans and œ100 million secured revolving credit facility for ZSC Specialty Chemicals Group Ltd., a subsidiary of the note issuer, have been assigned a Ba2 rating. The Senior Implied rating is Ba3 and the rating outlook is stable.
Moody's ratings reflect ZSC Specialty Chemical plc's diversified portfolio of largely higher-growth, niche specialty chemical businesses; the group's strong profit margin generation; management's successful track record in managing and growing the business portfolio; and the significant equity commitment by the sponsors. The ratings also, however, acknowledge the weak debt protection measurements of the company, the very competitive nature and increasing consolidation trends within the industry which will result in increased pricing pressures, as well as some portfolio concerns relating to customer concentration and some more mature, lower-margin businesses within Performance Intermediate Chemicals.
ZSC Specialty Chemicals plc ("Zeneca Specialties") is the œ 1.3 billion Cinven/Investcorp buyout of the specialty chemicals business of Zeneca plc who in April, 1999, merged to form AstraZeneca plc. Zeneca Specialties generated pro-forma 1998 turnover of œ 686 million ($ 1.1 billion) from six business divisions across a broad spectrum of specialty chemical products and services. Moody's ratings acknowledge the breadth of the product portfolio which limits the impact of downturns in any one segment, the balanced geographic diversification of sales (by destination: 48% Europe; 36% - Americas; 16% - Rest of World), as well as market leading positions in a number of its businesses, often protected by patent, by close partnerships with customers, or by regulatory barriers.
Moody's ratings acknowledge the predominantly high-growth nature of a number of the businesses, in particular in Life Science Molecules, as pharmaceutical and agrochemical companies continue to outsource production of chemical intermediates; within the Pool and Spa segment of biocides, driven by the company's environmentally-friendly portfolio of non-chlorine based sanitisers, as well as within the Specialist Colors segment, where strong demand for ink-jet printers by the home and small office segments, should drive favorable growth.
Despite strong anticipated growth rates in most business segments, Moody's believes that certain portfolio segments are more mature and command lower margins and may need to be repositioned or sold in order to sustain the recent strong margin performance of the group.
Moody's recognises that Zeneca Specialties is operating in an increasingly competitive industry environment, often facing significantly larger competitors who have been merging in recent months and are much better capitalised and hence, likely to be able to invest more to grow some of their business segments competing head-on with those of Zeneca Specialties. In particular in Life Science Molecules, customers, such as the major pharmaceutical firms, are looking for a handful of partners who can deliver a broad base of chemical intermediates for the production of their pharmaceutical products. In this segment, Zeneca Specialties currently relies predominantly on the success of a few products with several major companies, and will undoubtedly have to grow this business substantially, through internal as well as external means, both in order to compensate for potential pharmaceutical product failures at clinical trial stages, as well as to position the company longer-term as a mainstream partner for the supply of chemical intermediates to the major agrochemical and pharmaceutical multinationals.
Moody's ratings recognise the leveraged nature of Zeneca Specialties with pro-forma LTM to March 31, 1999 (Adjusted EBITDA-CAPEX)/Interest of 1.2x and Total Debt/Adjusted EBITDA of 5.9x. Although we anticipate strong operating cashflow generation to continue, high levels of growth CAPEX, in particular for Life Science Molecules, will likely limit deleveraging for the business going forward. Potential smaller-sized acquisitions and/or alliances that can be funded from internal cash generation or through existing debt facilities can also not be ruled out.
The B2 rating of the notes reflects the structural subordination of the notes and the significant amount of senior secured bank debt within the overall capital structure of the group. The Ba2 secured bank debt rating, one notch up from the senior implied rating, reflects the upstream operating company guarantees as well as the direct asset security taken over all the property, assets, and undertakings of the UK and US subsidiaries (including material intellectual property rights) which account for about 80% of the fixed assets, 70% of the receivables and close to 90% of the operating cashflow of the entire Zeneca Specialties group. In addition to this, the banks have share pledges and charges over subsidiaries in most other jurisdictions. Moody's believes that this level of security would likely be sufficient to ensure full repayment of the bank debt under a stress scenario. The B3 rating for the PIK preferred shares, reflects an additional element of subordination relative to the notes.
ZSC Specialty Chemicals plc is domiciled in Manchester, United Kingdom, and is a holding company for a diversified specialty chemicals group generating pro-forma 1998 revenues of œ 686 million ($ 1.1 billion).
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