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I AGREE
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.
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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
An der Welle 5
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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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