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Rating Action:

Moody's affirms Marcolin's B3 ratings following refinancing; outlook negative

18 May 2021

Milan, May 18, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the B3 corporate family rating (CFR) and the B3-PD probability of default rating (PDR) of Italian eyeglass manufacturer Marcolin S.p.A. (Marcolin). Moody's has also assigned a B3 rating to the proposed €350 million guaranteed senior secured notes due 2026 issued by Marcolin. The outlook on the ratings remains negative.

Proceeds from the new notes will be used to refinance existing debt, including the outstanding €250 million guaranteed senior secured notes due 2023, €40 million drawing under the revolving credit facility (RCF) maturing in 2022 and a €50 million bank loan maturing in 2025. The rating on the existing notes will be withdrawn upon repayment at completion of the refinancing.

"The affirmation of the rating reflects the improvement in Marcolin's liquidity following the planned refinancing, owing to the extension of the debt maturity profile and the restored availability under a new €46 million revolving credit facility," says Lorenzo Re, a Moody's Vice President - Senior Analyst and lead analyst for Marcolin.

"While the refinancing is leverage neutral, the negative outlook continues to reflect Marcolin's very high leverage, with future deleveraging remaining subject to a material improvement in operating performance which carries significant execution risk," Mr. Re added.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Marcolin's operating performance in 2020 was negatively impacted by Covid, with sales declining by 30% and EBITDA (as reported by the company and before one-off costs) dropping to €26 million from €56 million in 2019. One-off costs related to some restructuring actions and the early termination of non-core licenses, as well as working capital absorption, weighted on cash flow resulting in a material cash burn of almost €70 million. This outflow was covered by a €25 million cash injection from the shareholder and €63 million of additional debt, including a new State-backed €50 million term loan and €13 million additional drawings under the RCF.

Moody's expects the company's operating performance to recover in 2021, although remaining below pre-crisis levels with reported recurring EBITDA increasing towards €40 million from €56 million in 2019.

The proposed refinancing will extend the company's debt maturity profile to 2026 and will improve liquidity thanks to a new €46 million RCF, but will leave the overall amount of debt unchanged. As a result, leverage will remain very high with Moody's adjusted debt /EBITDA above 11x in 2021.

Deleveraging beyond 2021 remains subject to a material improvement in operating performance well above pre-Covid levels, implying sustained top-line growth, EBITDA margin improvement towards historical peak levels of 12% and continued reduction of working capital.

Marcolin is implementing several actions to support this improvement, including efficiency increases in its production plants, overhead cost reduction, optimization of the brand portfolio and the revamp of its distribution network in Asia. However, visibility on the pace of improvement remains low, as the uneven macroeconomic recovery and still low consumer confidence may hamper sales, while execution risk on a number of new initiatives, such as revenue growth from new licenses and optimization of inventories remains high. Therefore, Marcolin may not be able to restore a more sustainable capital structure in case of underperformance compared to its business plan.

Depending on the success of execution of the business plan, Moody's estimates that Marcolin's Moody's adjusted EBITDA in 2022 will be in the range of €50 million-€60 million, leverage would be at around 6.7x to 8.0x, and FCF would be neutral or only modestly positive.

Marcolin's credit profile is supported by the company's solid market position in the global eyewear market, with a well-balanced product and geographic diversification. The rating also factors the company's modest size and the risk of licenses not being renewed, owing to the lack of significant proprietary brands and the high sales concentration in a few brands. In addition to the very high leverage and weak free cash flow generation, the rating also reflects the company's weak EBIT/interest coverage ratio, which is expected to remain below 1x until 2023.

Marcolin's 49% stake in Thelios, the JV with LVMH, supports the rating, although Moody's does not expect it will materially contribute to Marcolin's cash flows in the next 12-18 months. However, this stake represents a source of financial flexibility as Marcolin could, at some point, sell it in case of need. Marcolin and LVMH have put/call options on this stake that can be exercised in 2027/2028.

LIQUIDITY

Marcolin's liquidity will improve following the refinancing, supported by approximately €55 million of cash expected as of March 2021 and the full availability under the new €46 million committed RCF. This will cover its capital spending of around €14 million-€15 million per year and sufficiently cover its seasonal working capital swing, with cash absorption in the first half of the year and release in the second half.

The RCF includes a springing financial covenant of 11.5x net leverage, tested quarterly when drawings exceed 40% of the RCF. As part of the refinancing, Marcolin obtained a covenant holiday with testing starting only from September 2022.

STRUCTURAL CONSIDERATIONS

The B3 rating assigned to the €350 million guaranteed senior secured notes is in line with the CFR, reflecting the fact that the notes represent most of the group's financial debt. While the €50 million super senior RCF ranks senior to the notes, its size is not enough to cause a notching down of the notes.

Moody's has assumed a 50% family recovery rate, as it is standard for capital structures that include both bonds and bank debt. The notes are secured by share pledges and are guaranteed (with some limitations under Italian law) by subsidiaries, representing at least 85% of the group's EBITDA.

The capital structure includes a €25 million shareholder loan, maturing in 2027, that is eligible for equity credit under Moody's criteria.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects the execution risk on Marcolin's restructuring plan and the risk that credit metrics may remain weaker than the 6.5x maximum leverage tolerance for the B3 rating category in the next 18-24 months in case of underperformance, with leverage remaining around 6.7x to 8.0x.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Negative pressure on the rating could materialise in case of (1) a deterioration in the company's liquidity profile; (2) failure to restore a sustainable capital structure in the next 18-24 months, with leverage, measured as Moody's adjusted gross debt /EBITDA not returning towards 6.5x; and (3) continued negative free cash flow for an extended period of time. In addition, failure to successfully complete the proposed refinancing would likely lead to immediate downward pressure on the rating.

Positive ratings pressure could arise over time if (1) the company's Moody's-adjusted debt/EBITDA returns to below 5.5x on a sustained basis; (2) its EBIT margin returns to high single-digit levels in percentage terms; and (3) liquidity remains adequate.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: Marcolin S.p.A.

....Gtd. Senior Secured Regular Bond/Debenture, Assigned B3

Affirmations:

..Issuer: Marcolin S.p.A.

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

.... Corporate Family Rating, Affirmed B3

Outlook Actions:

..Issuer: Marcolin S.p.A.

....Outlook, Remains Negative

COMPANY PROFILE

Headquartered in Italy, Marcolin S.p.A. (Marcolin) is a leading designer, manufacturer and distributor of eyewear, with a portfolio of around 30 licensed brands. The group has a global presence in both sunglasses and prescription frames. In 2020, the group reported €340 million in revenue and €26 million in recurring EBITDA. Since 2012, Marcolin has been controlled by private equity sponsor PAI Partners.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Lorenzo Re
Vice President - Senior Analyst
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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