New York, July 28, 2021 -- Moody's Investors Service ("Moody's") assigned
GEON Performance Solutions, LLC (GEON) a B2 Corporate Family Rating
(CFR), B2-PD Probability of Default Rating, and B2
rating to the company's proposed $600 million seven-year
senior secured term loan. Moody's also assigned a B2 rating
to the $60 million senior secured revolving credit facility.
Proceeds from the term loan, along with $60 million in cash
from the balance sheet, will be used to refinance $477 million
of existing debt, issue a $160 million dividend to shareholders
and pay related fees and expenses. The outlook is stable.
The assigned ratings are subject to review of final documentation and
no material change to the size, terms and conditions of the transaction
as communicated to Moody's.
"GEON's financial performance has rebounded nicely from the pandemic
as demand for PVC in key end markets has been strong; however,
the sizable amount of debt and dividend are offsetting factors to the
credit profile," said Domenick R. Fumai, Moody's Vice
President and lead analyst for GEON Performance Solutions, LLC.
Assignments:
..Issuer: GEON Performance Solutions, LLC
.... Corporate Family Rating, Assigned
B2
.... Probability of Default Rating,
Assigned B2-PD
....Senior Secured First Lien Term Loan,
Assigned B2 (LGD3)
....Senior Secured First Lien Revolving Credit
Facility, Assigned B2 (LGD3)
Outlook Actions:
..Issuer: GEON Performance Solutions, LLC
.....Outlook, Assigned Stable
RATINGS RATIONALE
GEON's B2 rating is constrained by significant exposure to cyclical
end markets such as the building and construction, transportation,
industrial and appliances industries. The credit profile further
considers GEON's relatively small scale and substantial geographic
concentration in North America. The rating is further tempered
by the fragmented nature of the compounding business with relatively low
barriers to entry. The rating is also limited by aggressive financial
policies as the private equity sponsors are expected to extract a sizable
dividend by increasing debt.
The B2 CFR reflects GEON's extensive industry expertise with a leading
position in the polyvinyl chloride (PVC) compounding market and as one
of the top independent polypropylene (PP) formulator and considerable
expertise in other polymers such as polyethylene, polycarbonates
and nylons. GEON has a large, well-established manufacturing
footprint, which provides a competitive advantage in PVC compounding,
and possesses strong R&D capabilities. The rating also assumes
that GEON will maintain its competitive position to offset any unanticipated
prolonged economic downturn. Many of the company's end markets
were challenged by weak economic conditions as a result of the coronavirus
pandemic. However, these end markets are recovering as the
pandemic subsides and economic growth is robust. Moody's
projects US GDP growth of 6.5% in 2021, which has
caused very strong demand growth and expanding margins in the first half
of 2021. This should also provide a favorable volume growth and
margin environment in the second half of 2021. Moody's expects
significant revenue and EBITDA growth in FY 2021 from last year,
resulting in credit metrics that are well-positioned for the rating.
Moody's forecasts DEBT/EBITDA, including Moody's standard
adjustments, to improve from mid-5x at the end of last year
to approximately 4.0x in FY 2021. GEON's rating benefits
from a well-known brand name and a diverse customer base with stable,
long-term relationships. GEON's rating also incorporates
low capital expenditure requirements due to its asset-light business
model, which should enable the company to translate most of the
EBITDA growth into free cash flow.
ESG CONSIDERATIONS
As a specialty chemicals company, GEON's environmental risks
are considered high. Although GEON does not manufacture PVC,
concerns around plastic waste are likely to lead to increased regulations
or deselection in non-durable consumer applications over time,
which is a relatively small end market for PVC. Additionally,
concerns over the phase out of phthalate plasticizers in most consumer
applications is an ongoing risk. These plasticizers have adverse
health effects (endocrine disruptors) in humans and animals. However,
there are an increasing number of higher molecular weight and non-phthalate
alternatives, which do not exhibit similar adverse health effects.
Plasticizers are used in most PVC applications to make the end products
more flexible, transparent and durable. GEON is likely to
benefit from favorable demographic trends as global standards of living
continue to improve, which should lead to increased consumption
of PVC and PP, two of the most widely used plastics. Additionally,
PVC and polypropylene are increasingly consumed as lighter-weight
substitutes for other materials to improve energy efficiency and reduce
emissions in vehicles. Positively, there are a number of
sustainability benefits to using PVC as it is not a single use product
and thereby offers the possibility for enhanced recycling solutions.
GEON is targeting a number of sustainability initiatives to be completed
by 2025 including reducing solid waste to landfills, cutting electrical
consumption by 15% and lowering greenhouse gas emissions though
increasing renewable energy sources. Governance risks are above-average
due to the private equity ownership, which includes a limited number
of independent directors on the board, reduced financial disclosure
requirements as a private company and more aggressive financial policies
compared to most public companies.
The stable outlook assumes that GEON's financial and operational
performance will improve in 2021 as volumes, revenues and EBITDA
grow because of the economic recovery.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's could upgrade the rating with expectations for adjusted
financial leverage (Debt/EBITDA) sustained below 3.5x, retained
cash flow-to-debt (RCF/Debt) above 15% on a sustained
basis, the company continues to demonstrate sufficient operational
progress as a standalone entity and its sponsors adhere to more conservative
financial policies, including absolute debt reduction and no further
dividends to shareholders. An upgrade would also require increased
scale and geographic diversity.
Moody's could downgrade the rating with expectations for sustained
adjusted financial leverage exceeding 5.0x, negative free
cash flow for a sustained period, deterioration in liquidity,
a significant debt-financed acquisition or a sizable dividend to
the sponsor.
GEON has a good liquidity profile and Moody's expects the company
will maintain cash on the balance sheet of at least $25 million
and full availability under its $60 million revolving credit facility.
Moody's also expects the company to generate positive annual free
cash flow of at least $25 million in FY 2022.
The debt capital structure is expected to be comprised of the proposed
$600 million 7-year senior secured term loan and a $60
million 5-year senior secured revolving credit facility.
The B2 ratings assigned to the term loan and revolving credit facility
are in line with the B2 CFR, reflecting the preponderance of secured
debt. The term loan does not contain any financial maintenance
covenants while the revolving credit facility has a springing first lien
leverage ratio covenant that is triggered when the facility borrowings
at the end of the quarter exceeds 35% of the total commitment.
The new credit facilities are expected to provide covenant flexibility
that if utilized, could negatively impact creditors including an
incremental first lien facility not to exceed the greater of $145
million and 100% of consolidated EBITDA, plus an unlimited
amount subject to a first lien net leverage ratio on the closing date
for pari passu senior secured debt. Amounts up to the greater of
$145 million and 100% of consolidated EBITDA may be incurred
with an earlier maturity date than the initial term loans. Only
wholly-owned subsidiaries must provide guarantees, raising
the risk of potential guarantee release; dividends or transfers resulting
in partial ownership of subsidiary guarantors could jeopardize guarantees,
with no explicit protective provisions limiting such guarantee releases.
Collateral leakage is permitted through transfers of assets to unrestricted
subsidiaries subject to carve-out capacity and other conditions;
there are no express "blocker" provisions restricting such
transfer of specified assets to unrestricted subsidiaries. There
are no express protective provisions prohibiting an up-tiering
transaction. The above are proposed terms and the final terms of
the credit agreement may be materially different.
The principal methodology used in these ratings was Chemical Industry
published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
GEON Performance Solutions, LLC, headquartered in Westlake,
OH, was formed after SK Capital Partners completed the acquisition
of Avient's (fka PolyOne Corporation) Performance Products &
Solutions business in October 2019. GEON is the leading polyvinyl
chloride compounder for the building and construction, industrial
and wire and cable end markets, a top 4 independent polyolefin formulator
and also provides contract manufacturing services for customers.
The company operates in two primary segments, Vinyl and Engineered
Polymer Solutions. GEON reported revenue of $579 million
for the fiscal year-ended December 31, 2020.
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,
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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_1288435.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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.
Domenick R Fumai
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
