New York, January 29, 2020 -- Moody's Investors Service, ("Moody's") affirmed
Alchemy US Holdco 1, LLC's ("Kymera") ratings including a
B2 Corporate Family Rating (CFR), a B2-PD Probability of
Default Rating ("PDR") and a B2 rating of the Senior Secured Term Loan
B. The outlook is stable. Kymera is upsizing its existing
$234 million first lien term loan B by $165 million.
Proceeds from the incremental term loan together with $80 million
cash contribution from the sponsor, Palladium Equity Partners,
will be used to fund the acquisition of AMETEK, Inc's (unrated)
Reading Alloys ("Reading") business for a total consideration
of $250 million and to pay related transaction fees and expenses.
Outlook Actions:
..Issuer: Alchemy US Holdco 1, LLC
....Outlook, Remains Stable
Affirmations:
..Issuer: Alchemy US Holdco 1, LLC
.... Probability of Default Rating,
Affirmed B2-PD
.... Corporate Family Rating, Affirmed
B2
....Senior Secured Bank Credit Facility,
Affirmed B2 (LGD4)
The ratings are subject to the transaction closing as proposed and receipt
and review of the final documentation.
RATINGS RATIONALE
Kymera's B2 corporate family rating reflects its relatively stable
EBITDA generation and modest capital intensity supporting the EBITDA conversion
to free cash flow, its variable cost structure and countercyclical
nature of working capital supporting the performance during periods of
falling volumes and metal prices. The rating is also supported
by management's strategy to enhance profitability by moving the
product mix toward more value-added products and by a pass-through
provision in a substantial portion of the company's contracts lending
some stability to the financial performance. The rating also benefits
from high industry barriers to entry, broad geographic and customer
diversity within mostly industrial end-markets and good liquidity.
Kymera's rating is constrained by the company's high financial leverage,
modest scale and moderate organic growth prospects in several end-markets
it serves.
Kymera performance is highly dependent on cyclical industrial, automotive
and chemical end-markets. However, by acquiring Reading,
a leading supplier of titanium master alloys, titanium powders and
thermal barrier coatings to the aerospace and medical industries,
Kymera will expand its product offering and improve its end market diversity
by significantly increasing its exposure to highly specialized,
regulated, heavily contracted and relatively more stable aerospace
and defense end markets. The acquisition, notwithstanding
the current situation with Boeing 737 MAX aircraft, positions the
company to capitalize on longer-term growth opportunities associated
with lightweighting trends and the expected increase in titanium usage
in aerospace and defense sectors. The addition of Reading's
higher-margin products should also notably increase the share of
higher value-added products in Kymera's portfolio,
helping the company potentially grow revenues above GDP rates and improve
profitability. Adjusted EBITDA margins, on a pro forma basis
for the transaction, are expected to rise above the 15% threshold
typically associated with specialty chemical companies.
Kymera will also benefit from a moderately larger scale and will have
a greater exposure to North America than to Europe and the rest of the
world combined. That said, despite serving a diverse customer
base, after the acquisition, Kymera will have a higher customer
concentration with 40% of the gross profit to be generated from
top 10 customers as compared to 24% previously. The company
expects to derive meaningful synergies from the merger by combining procurement,
manufacturing, administrative and other functions and by pursuing
additional sales opportunities.
Moody's estimates adjusted interest coverage around 3 times (EBITDA/Interest)
and adjusted financial leverage about 5 times (Debt/EBITDA) on a pro forma
basis for the twelve months ended December 31, 2019. Although
Kymera's performance deteriorated in the last few quarters as customers-specific
events and the softness in global economic conditions weighed on its financial
results, Moody's expects that Kymera's stand-alone
operating and financial performance will stabilize in 2020. This,
along with the contribution of Reading EBITDA and anticipated FCF generation
that could be used for debt reduction, should help reduce the leverage
to the range of 4.7x-4.9x over the next 12-18
months. The rating does not incorporate expectations for meaningful
discretionary debt reduction in the medium term, but assumes that
management will take actions necessary to maintain appropriate credit
metrics during an economic downturn.
As an emerging specialty chemicals company, Kymera overall faces
moderate environmental, social and governance risks. However,
governance risk is above average due to private equity ownership,
which is expected to engage in shareholder-friendly activities
and M&A, potentially limiting the company's ability to
consistently and sustainably reduce financial leverage.
Kymera will have good liquidity to support operations with about $8
million in cash balances and $50 million available under the asset
based revolving credit facility (ABL) at the closing of the transaction.
Moody's expects that the ABL will remain undrawn absent a substantive
increase in aluminum or copper prices that increases the company's net
working capital position. The credit agreement for the revolving
credit facility only contains a springing fixed coverage ratio based on
the excess availability. Moody's does not expect the covenant to
be triggered in 2020 and, if it was triggered, expects that
the company would be able to comply with a reasonable cushion.
The first lien senior secured term loan does not have any financial maintenance
covenants.
The stable outlook assumes that the company will generate positive free
cash flow, excluding an unexpected period of significant increases
in metal prices, and maintain adjusted financial leverage below
5.5 times over the next 12-18 months. Moody's could
downgrade the rating with expectations for adjusted financial leverage
sustained above 5.5 times, free cash flow tracking below
5% of debt, or a substantive deterioration in liquidity.
A debt-financed return of capital to the sponsor or a material
step-out acquisition could also have negative rating implications.
Moody's could upgrade the rating with expectations for improved size and
scale, adjusted financial leverage sustained below 4.0 times,
free cash flow to debt sustained above 10%, and a commitment
to more conservative financial policies.
The principal methodology used in these ratings was Chemical Industry
published in March 2019. Please see the Rating Methodologies page
on www.moodys.com for a copy of this methodology.
Headquartered in North Carolina, Kymera produces non-ferrous
metal powders, with particular focus on copper and aluminum powder.
Following the closing of the transaction, the company will operate
10 plants spread across United States, Australia, China,
Europe and the Middle East serving diverse end-markets including
aerospace, industrials, chemicals, automotive and medical
sectors.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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 credit rating action on the
support provider and in relation to each particular credit 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 credit rating action,
and whose ratings may change as a result of this credit 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Botir Sharipov
VP-Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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U.S.A.
JOURNALISTS: 1 212 553 0376
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