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Rating Action:

Moody's assigns B2 CFR to Atlas Rigid GmbH; stable outlook

28 Jun 2018

Moody's assigns B2 ratings to the EUR317 million term loan B due 2025 and to the EUR50 million revolving credit facility due 2024, and assigns Caa1 rating to the EUR70 million second lien term loan due 2026

London, 28 June 2018 -- Moody's Investors Service, (Moody's) has today assigned a B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to the German rigid plastic packaging manufacturer Atlas Rigid GmbH ("Coveris Rigid" or the "company"). Concurrently, Moody's has assigned a B2 rating to the EUR317 million senior secured term loan B due 2025 and to the EUR50 million senior secured revolving credit facility (RCF) due 2024, and a Caa1 rating to the EUR70 million senior secured second lien term loan due 2026, all to be issued by Atlas Packaging GmbH, a subsidiary of Atlas Rigid GmbH. The outlook on all ratings is stable.

The proceeds from the first and second lien facilities, together with EUR245 million of equity (EUR95 million in cash and EUR150 million in the form of a shareholder loan), will be used to support the acquisition of Coveris Rigid by private equity firm Lindsay Goldberg and to pay transaction fees. The capital structure also includes a EUR50 million RCF, undrawn at close, certain factoring arrangements and capital leases which will be rolled over with the transaction. Coveris Rigid is currently a division of Coveris Holdings S.A. (B3 stable).

This is the first time that Moody's has assigned a rating to Coveris Rigid.

The list of affected ratings is included at the end of this press release.

RATINGS RATIONALE

Today's assignment of the B2 CFR to Coveris Rigid reflects (1) the company's position as a leading pan European rigid plastic converter with strong market share in dairy, but also in foodservice with tumblers, in convenience food niches, and with a significant involvement in the thermoformed detergent packaging of Procter & Gamble in Europe benefitting from a well-invested asset base of 18 sites across Western and Eastern Europe, and 1 in North America; (2) a moderately diversified customer base with 2,500 customers, the ten largest representing 39% of 2017 revenue and long-standing relationships averaging 15 years with key customers, although fairly concentrated within diary with Danone, Arla and others, within spreads and in personal care with Procter & Gamble; and (3) its presence in resilient end-markets such as food and beverages representing 82% of 2017 revenue, although the spreads segment is declining.

Conversely, the B2 rating is constrained by (1) Coveris Rigid's smaller scale both by revenue and EBITDA in comparison to other rated packaging peers such as RPC Group PLC (Baa3 stable) or Berry Global Group Inc. (Ba3 stable) and its lower profitability by EBITDA margin compared to peers of similar size such as Faerch Plast Midco ApS (B3 stable); (2) its exposure to volatile raw material and input prices, particularly plastic resins which continue to rise, partially mitigated by pass-through clauses present in two third of the contracted revenue albeit with a lag; and (3) the highly fragmented and competitive nature of the plastic packaging industry with ongoing pressure as evidenced by historic 10-15% volume churn and customer losses, requiring continued focus on innovation, product wins and cost control to grow volumes and protect the profitability.

The rating is constrained by the high Moody's-adjusted leverage of 6.8x at close pro forma for the transaction with future deleveraging contingent on several areas of execution risk such as the successful pass through of raw material price increases occurred in 2017, the turnaround of the UK site and the normalization of the North America operations, new contract wins including short term growth projects to offset price pressure and volume churn. Historically, projects represented a significant growth driver for Coveris Rigid but at the same time constrained, together with working capital swings, the free cash flow generation of the company. The strategy remains risky because specific customer projects in the business plan could be delayed, cancelled or not materialize.

Moody's forecasts some EBITDA recovery in 2018 mainly from price adjustments related to raw materials but slow growth thereafter assuming the EU proposal will not affect the business during the rating horizon. As a result, Moody's-adjusted leverage is expected to fall toward 6.0x in 2018 and remain fairly stable thereafter.

Moody's notes that there could be a potential adverse impact on the business arising from the recent EU announcement regarding the intention to ban the use of single use plastic containers or reduce their consumption. The company does not have any products in the EU banned list but around 5% by revenue are in the consumption reduction targets list. The range of products affected and the timing of implementation will however depend and be determined by a EU Directive, followed by a decision in each member state. Moody's also notes that the company has started raw material substitution processes in order to comply with the EU target to achieve 100% of plastic recyclability by 2030, by focusing on a smaller amount of recyclable polymers.

Coveris Rigid is weakly positioned in the B2 category.

LIQUIDITY

Moody's considers Coveris Rigid's liquidity position to be adequate for its near term requirements. This is underpinned by a EUR50 million RCF, undrawn at close, positive free cash flow albeit constrained by working capital requirements and project based capital expenditures, and lack of debt amortisation until 2024 when the RCF matures. The company has access to certain factoring arrangements, both on and off balance sheet, which Moody's assumes will be renewed on an ongoing basis. The RCF has a net leverage springing covenant tested only when drawings exceed 35% of total commitment. Moody's anticipates large headroom under this covenant in the next 12 to 18 months.

STRUCTURAL CONSIDERATIONS

The CFR has been assigned to Atlas Rigid GmbH, the top entity of the restricted group which will produce the consolidated audited accounts going forward. Using Moody's Loss Given Default (LGD) methodology, the B2-PD PDR is aligned to the B2 CFR. This is based on a 50% recovery rate, as is typical for transactions with covenant-lite bank debt structure.

The B2 instrument rating assigned to the EUR317 million senior secured term loan B due 2025 and the EUR50 million senior secured RCF due 2024 are also in line with the CFR, reflecting relatively limited size of the EUR70 million second lien, rated at Caa1. The debt facilities will be secured by pledges over shares, certain bank accounts and receivables and they will be guaranteed by all material subsidiaries representing not less than 80% of the EBITDA calculated on a non-consolidated basis. The first lien and the RCF rank pari passu but ahead of the second lien upon enforcement.

Moody's notes the presence of a EUR150 million shareholders loan, which is treated as equity.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that the company will recover part of the EBITDA from the exceptionally high resin price volatility in 2017 and delever to below 6.0x over the next 12 to 18 months and it will be able to withstand the competitive pressure and successfully replace churned volumes with new contract wins or projects. The stable outlook also assumes that the company will not lose any material customer, it will not engage in material debt-funded acquisitions or shareholder distributions and there will be no materially adverse regulatory measures on plastic sustainability affecting the company within the rating horizon.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure on the ratings is unlikely in the near term, however it could develop if (1) the company improves its scale and profitability, (2) its Moody-adjusted debt/EBITDA trends sustainably below 5.0x; (3) its free cash flow to debt rises above 5%; while (4) maintaining a good liquidity profile.

Negative pressure on the ratings could arise if (1) the company's operating performance is under pressure as a result of increased competition reflected in its EBITDA margins moving towards the low-teens; (2) the company fails to delever below 6.0x within 12 to 18 months; or (3) the liquidity materially deteriorates. Negative pressure will also arise in case of material debt-funded acquisitions.

LIST OF AFFECTED RATINGS

..Issuer: Atlas Rigid GmbH

Assignments:

.... Corporate Family Rating, Assigned B2

.... Probability of Default Rating, Assigned B2-PD

Outlook Actions:

....Outlook, Assigned Stable

..Issuer: Atlas Packaging GmbH

Assignments:

....BACKED Senior Secured Bank Credit Facility, Assigned B2

....BACKED Senior Secured 2nd lien Bank Credit Facility, Assigned Caa1

Outlook Actions:

....Outlook, Assigned Stable

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.

Headquartered in Zell, Germany, Coveris Rigid is a producer of rigid plastic packaging for food (82% of 2017 revenue) and non-food (18%) applications within the consumer goods end markets. The company offers an extensive range of products in a variety of shapes and designs including containers & cups, trays, closures and sheets. The company has a pan-European presence across 18 production sites and 3 sales offices geared towards Eastern Europe, plus the North American operation.

In 2017, Coveris Rigid generated revenues of EUR558 million, employing over 3,000 people with the largest sites located in Poland and Hungary.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Donatella Maso
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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