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Rating Action:

Moody's assigns B1 CFR and (P)Ba3 and (P)B3 bond ratings to Ontex, outlook stable

21 Mar 2011

First-time issuer; EUR805 million to be issued

Frankfurt am Main, March 21, 2011 -- Moody's Investors Service has today assigned a B1 corporate family rating (CFR) and a B1 probability of default rating (PDR) to Ontex IV S.A., the holding company of Ontex Group ("Ontex" or "the company"). Concurrently, Moody's has assigned the following ratings to notes to be issued by Ontex IV S.A: a provisional (P)Ba3 rating to the EUR570 million worth of proposed senior secured notes maturing in 2018; and a (P)B3 rating to the EUR235 million worth of senior unsecured notes maturing in 2019. The outlook on the ratings is stable. This is the first time that Moody's has rated Ontex.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect the rating agency's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavor to assign a definitive rating to the debt instruments. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

"The assignment of the B1 CFR reflects: (i) Ontex's strong market position in the production of private-label hygienic disposables; (ii) its solid relationships with major European retailers and only moderate customer concentration; (iii) stable market fundamentals in the low-cyclical discretionary personal care industry; and (iv) an improved cost base on the back of successful restructuring and efficiency enhancement initiatives over recent years," says Anke Rindermann, Moody's lead analyst for Ontex. "Despite challenging market conditions, tight cost management enabled Ontex to mitigate negative effects from volume and margin pressure due to a high level of branded product promotional activity and inflating input costs recently. Moody's assumes that, going forward, achieved improvements in operating profitability can largely be sustained on the back of higher volumes and improved internal efficiencies," adds Mrs. Rindermann. Moreover, the rating reflects the rating agency's assumption of a solid liquidity cushion going forward, including continued positive free cash flow generation.

On a more negative note, the B1 CFR reflects Ontex's highly leveraged capital structure following the secondary buyout in June 2010 with initial leverage pro forma the recapitalization in excess of 5.5x Debt/EBITDA (as adjusted by Moody's), which we assume will improve over 2011 only gradually. More fundamentally, the CFR also considers (i) Ontex's limited size relative to its rated peers and its narrow product focus; (ii) the price-competitive nature of the industry, with retailers enjoying strong bargaining power. In addition, input price management is a major challenge as only a minor proportion of Ontex's contracts contain automatic pass-through mechanisms, leaving the company exposed to individual negotiations with its customers. Moreover, the company's strategy to expand into higher-growth emerging markets through both organic growth and potential opportunistic acquisitions could delay further improvements in its credit metrics.

The stable outlook incorporates Moody's expectation that Ontex will continue to implement margin-enhancing initiatives and will conduct a prudent investment policy to generate further growth. In the rating agency's view, this should result in gradually improving credit metrics as indicated by leverage moving to around 5.5x debt/EBITDA per year end 2011 and towards 5 times over 2012. In addition, we assume that, if the bonds are issued, Ontex will have an adequate liquidity profile, including moderate breakeven free cash flow generation and preserves flexibility under its financial covenant. The stable outlook also reflects Moody's expectation that Ontex will restrict its efforts to grow to capex spending of around 2-3% of sales and potential bolt-on acquisitions.

The rating would likely encounter upward pressure if the company were to manage to improve and sustain leverage, in terms of debt/EBITDA, below 4.5x on the back of (i) further profitability improvements, such as EBITA margins approaching the mid-double digits on a sustainable basis; and (ii) continued positive free cash flow generation, to be applied to the reduction of net debt.

The rating could come under negative pressure if: (i) Ontex's leverage, in terms of debt/EBITDA, were to remain materially above 5.5x; (ii) its free cash flow were to enter negative territory; or (iii) the company's profitability were to decline, reflected by EBITA margins falling into single digits.

The proposed notes issuance is intended to refinance bank loans and a vendor payment-in-kind (PIK) note, which were put in place in June 2010 following the secondary buyout by funds controlled by Goldman Sachs and TPG.

Moody's has assigned a (P)Ba3 (loss-given default (LGD) 3, 38%) instrument rating to Ontex's EUR570 million worth of proposed senior secured notes. The issuer, Ontex IV S.A., is a holding company under Luxembourg law and the ultimate holding company of the restricted group. The instrument rating is one notch above the B1 CFR, reflecting Moody's expectation of a relatively higher recovery rate in a distress scenario, given that the instrument is secured by a pledge on the majority of the company's tangible assets. In addition, the senior secured notes will benefit from upstream guarantees of operating subsidiaries that account for at least 85% of the company's consolidated sales, EBITDA and gross assets, which ensures proximity to operating cash flows. Moody's has assigned a (P)B3 (LGD 5, 89%) rating the EUR235 million worth of senior unsecured notes to be issued by Ontex IV S.A., given that these notes do not benefit from any tangible collateral and that guarantees by the majority of operating subsidiaries will be granted only on a subordinated basis.

Ontex's bank debt relating to a EUR50 million super priority revolving credit facility will rank ahead of the company's senior secured notes in an enforcement scenario. In addition, Ontex's capital structure includes a smaller amount of lease claims and claims related to pension obligations, which rank pari passu with the proposed senior unsecured notes in the company's debt structure.

Assignments:

..Issuer: Ontex IV S.A.

.... Probability of Default Rating, Assigned B1

.... Corporate Family Rating, Assigned B1

....Senior Secured Regular Bond/Debenture, Assigned a range of 38 - LGD3 to (P)Ba3

....Senior Unsecured Regular Bond/Debenture, Assigned a range of 89 - LGD5 to (P)B3

The principal methodologies used in this rating were Global Packaged Goods Industry published in July 2009, and Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Ontex, based in Zele, Belgium, is the market-leading manufacturer of private-label hygienic disposables in Europe, with products including baby diapers, adult incontinence products and femcare. With 12 production facilities in seven countries, the company generated revenues of approximately EUR1.2 billion in 2010. Following the secondary buyout from Candover, Ontex's majority shareholders are a consortium of funds controlled by Goldman Sachs and TPG.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of assigning a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

Frankfurt am Main
Anke Rindermann
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
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JOURNALISTS: 44 20 7772 5456
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Moody's assigns B1 CFR and (P)Ba3 and (P)B3 bond ratings to Ontex, outlook stable
No Related Data.
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