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Rating Action:

Moody's affirms Berlin's B3 CFR and all other ratings

11 Dec 2019

Approximately $950 million of rated debt affected

NOTE: On December 31, 2019, the press release was corrected as follows: The last sentence of the first paragraph was changed to: “The acquisition will be financed by an add-on to the First Lien Term Loan and will be privately placed.” Revised release follows.

New York, December 11, 2019 -- Moody's Investors Service ("Moody's") has affirmed Berlin Packaging LLC's (Berlin) B3 Corporate Family Rating (CFR) and B3-PD probability of default. All other instrument ratings are affirmed and the stable outlook remains unchanged. The affirmation follows the announcement that Berlin has entered into a definitive agreement to acquire Netherlands based Novio Packaging Group B.V. The acquisition will be financed by an add-on to the First Lien Term Loan and will be privately placed.

Affirmations:

..Issuer: Berlin Packaging LLC

.... Corporate Family Rating, Affirmed B3

.... Probability of Default Rating, Affirmed B3-PD

....Senior Secured Term Loan B1, Affirmed B3 (LGD3)

....Senior Secured 1st lien Term Loan, Affirmed B3 (LGD3)

....Senior Secured 1st lien Revolving Credit Facility, Affirmed B3 (LGD3)

Outlook Actions:

..Issuer: Berlin Packaging LLC

....Outlook, Remains Stable

RATINGS RATIONALE

The affirmation of the B3 corporate family rating and stable outlook, despite pro forma leverage of approximately 7.5 times, primarily reflects expectations of good free cash flow and adequate liquidity and management's pledge to dedicate all free cash flow to debt reduction until metrics have been restored to a level within the rating triggers. Additionally, some growth in EBITDA is projected from acquisitions, an eventual reduction in costs for various initiatives and the benefits of these initiatives. The company is expected to benefit from its increased exposure in Europe and manage its growing currency exposure soundly. Berlin is expected to continue to generate good free cash flow despite the increase in interest expense, elevated costs for various initiatives and continued dividend payments. Additionally, the company is expected to have full availability under the $75 million revolver and $19.5 million in cash on the balance sheet at the close of the transaction. Moreover, Berlin is expected to maintain the current Unicredit asset backed facility in Europe. Credit metrics are expected to return to a level within the rating triggers within the next 12 to 18 months. Berlin will need to execute on its operating and integration plans without negative variance or further acquisition risk in order to maintain the current corporate family rating.

Weaknesses in Berlin's credit profile include its high leverage, substantial portion of business not under contract with cost pass through provisions and the fragmented and competitive market. Additionally, Berlin's product line is largely commoditized. While some business is under contract, contracts do not include a formula-based pass-through for changes in raw material costs (but allow for pass-through of price increases from suppliers with sufficient notice). Berlin's credit profile is also constrained by its acquisition strategy and financial aggressiveness.

Strengths in Berlin's credit profile include its good competitive position and exposure to more stable end markets, such as food and beverage and pharmaceuticals. The company has greater scale (sales) than most competitors and has a network of facilities throughout the USA. The top ten customers account for less than 11% of sales and no customer generated more than 1.5% of sales. As a distributor and service provider, Berlin does not require high capital expenditures or working capital investments and has the ability to generate meaningful free cash flow in the absence of high leverage or dividend payments.

The stable rating outlook reflects an expectation that Berlin's credit metrics will improve over the rating horizon but remain within the rating category.

The rating could be upgraded if Berlin sustainably improves its credit metrics within the context of a stable operating and competitive environment and the maintenance of good liquidity. Specifically, the rating could be upgraded if leverage declines below 5.25 times, funds from operations to debt increases to over 8.0% and EBITDA to interest expense increases to over 2.75 times.

The rating could be downgraded if Berlin fails to improve credit metrics or if leverage increases due to a significant debt-financed acquisition. The rating could also be downgraded if there is any deterioration in operating and competitive environment or liquidity. Specifically, the rating could be downgraded if debt/EBITDA remains above 6.5 times, funds from operations to debt decreases below 6.0% or EBITDA to interest expense declines below 2.0 times.

Berlin's good liquidity is characterized by expected good free cash flow generation, full availability under its revolving facility. Cash on the balance sheet fluctuates as the company accumulates cash, which it eventually uses for acquisitions. Berlin's $75 million revolver will expire in November 2024. The company is also projected to have additional local lines of credit at certain operating subsidiaries. While the revolver is expected to remain undrawn, the company has used revolver borrowings in the past to finance acquisitions. The only financial covenant is a springing first lien net leverage ratio on the revolver if borrowings exceed 35% of the total revolver amount. The facilities include an excess cash flow sweep. Term loan amortization is approximately 1% annually. The next debt maturity is the revolver in November 2024. All assets are encumbered by secured debt in the capital structure so there are very limited alternative sources of liquidity.

Berlin is a distributor and not a manufacturer of packaging products. However, the industry has come under increasing scrutiny and the company will need to continue to remain vigilant with its sourcing to ensure all regulations are met. Berlin's manufacturers are subject to a broad range of federal, state, provincial and local environmental, health and safety laws, including those governing discharges to air, soil and water, the handling and disposal of hazardous substances and the investigation and remediation of contamination resulting from the release of hazardous substances.

Various proposed and instituted mandates around the globe demonstrate the increased focus on environmental issues in the industry including improving recyclability and reducing waste. As distributors, Berlin will have to closely monitor environmental regulations and the impact it will have on its manufacturers. Increasing regulation will require attention and vigilance. Additionally, there will be an increasing emphasis on recyclability and, potentially, manufacturing plastic products from more biodegradable substrates. The company will need to continue to focus on adapting to an evolving regulatory environment.

The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass, and Plastic Containers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Chicago, Illinois, Berlin Packaging LLC is a distributor of rigid packaging for food and beverage, household and personal care and healthcare markets. Berlin also provides various services to the industry including sourcing, design, consulting, warehousing, and financing services. For the twelve months ended June 30, 2019, sales totaled approximately $1.4 billion. The company was recapitalized by Oak Hill Capital Partners Berlin was recapitalized by Oak Hill Capital Partners and CPPIB at the end of 2018, and they do not publicly disclose financial information (was previously a portfolio company of Oak Hill since 2014).

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.

Edward Schmidt, CFA
Vice President - 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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