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Rating Action:

Moody's affirms Xella's B3 CFR; stable outlook

20 Jul 2022

Frankfurt am Main, July 20, 2022 -- Moody's Investors Service ("Moody's")  has today affirmed the corporate family rating (CFR) of the German manufacturer of wall-building and insulation materials LSF10 XL Investments S.a r.l (Xella) at B3 and the probability of default rating (PDR) at B3-PD. Concurrently, Moody's has affirmed B3 instrument ratings on senior secured facilities - the first lien Term Loan B (TLB) maturing in 2028 and the first lien Revolving Credit Facility (RCF) maturing in 2027 - all issued by LSF10 XL Bidco SCA and guaranteed by LSF10 XL Investments S.a r.l. The rating outlook on both entities remains stable.

RATINGS RATIONALE

Today's rating action reflects Xella's decision to distribute the majority of cash proceeds from the sale of its insulation business URSA that amounted to EUR968 million and has been completed in May 2022. At completion the company has repaid EUR285 million of the TLB, reducing its outstanding amount to EUR1,660 million, and has distributed EUR595 million from the restricted group to fund the PIK note partial repayment, reducing its outstanding amount to EUR100 million, and the shareholder distribution. The remaining EUR87 million remained on the balance sheet.  

Considering the deconsolidation of URSA and the debt repayment, Moody's adjusted gross leverage at the end of Q1 2022 was around 7.6x, which is high for the current rating category. The sale of URSA has weakened Xella's business profile because it reduced its diversification and exposure to generally more resilient renovation markets that will continue to benefit from the EU's ambition to at least double the renovation rate by 2030. With the remaining production of wall-building materials Xella is mostly exposed to the volatility of new build construction (80-85% of revenue), within which predominantly to residential construction.

The macroeconomic uncertainty has increased significantly since Russia's invasion of Ukraine. High inflation rates across Europe not seen for decades and the corresponding increase in mortgage rates are risks that may drive a material slowdown in new residential construction in Europe, negatively impacting Xella's future operating performance that has been very solid in the past several years. However, the company retains a large amount of liquidity on the balance sheet (EUR294 million as of May 2022), which along with the almost fully undrawn EUR283 million RCF presents a strong cushion in case of recessionary development in Europe.

Xella's B3 CFR is supported by (1) its solid market position being the leading European producer of autoclaved aerated concrete (AAC) and calcium silicate units (CSU); (2) diversification across Western and Eastern Europe; (3) flexible production with largely variable cost structure and a relatively low energy intensity; and (4) the strong liquidity profile.

However, the rating is constrained by (1) its high exposure to more cyclical and volatile new-build construction (80% - 85% of group sales); (2) high inflation and macroeconomic uncertainty; (3) relatively aggressive financial policy as evidenced by a number of dividend distributions in the past; (4) still EUR100 million of PIK notes outstanding outside of the restricted group, which increase the risk of potential cash leakage over time; and (5) event risk associated with potential acquisitions considering Xella's strong liquidity position.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation that the company's credit metrics will be broadly maintained after the sale of URSA and the corresponding dividend distribution, with the gross leverage ratio staying in the range of 7x – 7.5x in the next 12-18 months. Furthermore, we expect Xella to maintain its strong liquidity, which is a significant mitigant against the recession risk.

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

WHAT COULD MOVE THE RATINGS - UP

Positive rating pressure could arise if:

• Moody's adjusted gross debt/EBITDA declines sustainably below 6x;

• Moody's adjusted retained cash flow/ net debt in high single digit;

• Positive free cash flow generation with FCF/ debt approaching mid-single digit.

WHAT COULD MOVE THE RATINGS -- DOWN

Conversely, negative rating pressure could arise if:

• Moody's adjusted gross debt/EBITDA increases sustainably above 7.5x;

• Moody's adjusted EBITA/ Interest below 1x;

• Substantial deterioration in liquidity profile as a result of large negative FCF, aggressive shareholder distributions or M&A.

STRUCTURAL CONSIDERATION

In the loss-given-default (LGD) assessment for Xella, Moody's ranks pari passu EUR1,660 million guaranteed 1st lien senior secured TLB that remains outstanding after the repayment of EUR285 million following the disposal of URSA and the guaranteed 1st lien senior secured EUR283 million RCF, which share the same collateral package, mainly consisting of share pledges over operating subsidiaries of the Xella group accounting for at least 80% of the group's assets and EBITDA. These instruments are rated B3 in line with the corporate family rating.

The capital structure also includes the remaining EUR100 million PIK notes after the partial repayment following the disposal of URSA. These notes will mature after the senior secured loans and are not guaranteed by the restricted group. Therefore, and since the notes were down-streamed into the restricted group as common equity, Moody's does not include it in debt and leverage calculations. However, the existence of the PIK notes implies an additional risk of potential cash leakage over time, even though the materiality of this risk has reduced following the sizeable repayment.

LIQUIDITY

The liquidity profile of the company is strong. This is reflected in EUR294 million of cash as of the end of May 2022 and pro-forma the dividend distribution, complimented by almost fully available EUR283 million revolving credit facility (RCF) maturing in October 2027. We believe that Xella's liquidity sources are more than enough to cover its working capital seasonality during the year and the capital investment requirements of the group, providing a strong cushion in case of recession. Xella's current debt structure is covenant lite, having a springing covenant set at 9.48x senior secured net leverage, applicable only to the RCF when it is drawn by more than 40%.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS

Moody's takes into account the impact of environmental, social and governance (ESG) factors when assessing companies' credit quality. The main environmental and social risks are not material in case of Xella. The company is less exposed than cement peers to environmental risks as its production process is significantly less energy intensive than the production of cement. However, the company is owned by the private equity firm Lone Star. Moody's views its financial policy as aggressive favouring shareholders over creditors as evidenced by a number of large dividend distributions in the past despite relatively leveraged capital structure.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Building Materials published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74988. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Luxembourg, LSF10 XL Investments S.a r.l (Xella) is the holding company of the Xella group. Xella is a leading European multi-brand manufacturer of modern wall-building materials for use in residential and non-residential construction. Xella was acquired by Lone Star Funds in a secondary leveraged buyout in April 2017. In the last twelve months ended March 2022, the company reported EUR1.2 billion revenue from continuing operations.

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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 https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 https://ratings.moodys.com.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Vitali Morgovski, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main, 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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