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Rating Action:

Moody's affirms Alchemy US Holdco 1, LLC's (Kymera) B2 ratings: outlook stable

29 Jan 2020

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
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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