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Rating Action:

Moody's assigns B2 ratings to LSF11 Skyscraper, stable outlook

02 Jul 2020

Frankfurt am Main, July 02, 2020 -- Moody's Investors Service today assigned a B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to LSF11 Skyscraper HoldCo S.a.r.l. (Skyscraper) as well as a B2 rating to the €700 million tranche of the senior secured term loan B and the €150 million revolving credit facility. The outlook on the ratings is stable.

RATINGS RATIONALE

Skyscraper's B2 ratings are underpinned by the company's international presence as one of the largest construction chemical companies with strong market positions in admixtures and construction systems. Skyscraper has a balanced regional revenue split with almost an equal split between Europe, the Americas as well as the Asia Pacific/Middle East & Russia regions. As part of the carve-out from its parent BASF (SE) (A3 stable) Skyscraper has good prospects of improving its so far lagging operating profitability against peers such as Sika AG (unrated) or GCP Applied Technologies Inc. (Ba3 stable) when it sets up a new and leaner organizational structure. This results in lower legacy and overhead costs and contributes to the EBITDA margin expansion from 13.7% in 2019 approaching levels of 15% by 2022. Sika and GCP in 2019 had Moody's-adjusted EBITDA margins of 17.3% and 15.3% respectively.

Whilst the emerging market presence is positive from a revenue growth perspective, it generally results in higher earnings volatility. This was the case during the 2015-2018 period when EBITDA from the Middle East and Russia declined by €45 million, or 61%, largely due to the impact of the lower oil price on oil-exporting countries. Following the decline of oil prices year-to-date, a reversal to higher construction activity in the Middle East for the next two years appears limited.

The expected closing of the transaction in Q3 2020 is an important consideration from a liquidity management perspective. Historically, around 70% of the company's revenues are generated during the main construction season in the northern hemisphere from March to October with a material part of the cash collection taking place in the period August to December after a net working capital peak around June/July. The initial low cash balance at closing of the transaction of €50 million will thus be bolstered by working capital inflows during the period. The company has available at signing a €150 million revolving credit facility.

The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The assignment of B2 ratings takes into account the impact on Skyscraper. The company was hardest hit in the month of April, when many countries where Skyscraper operates had implemented restrictions on movement. The easing of those restrictions resulted in a gradual improvement over the months of May and June. Skyscraper said that in the first three weeks of June its revenues were unchanged year-on-year. The decline in oil and gas prices will in Moody's opinion have a positive impact on the company's contribution margin in 2020, albeit with a lag of up to six months. This will partially offset the decline of revenues that Moody's expects to be -7.0% in 2020.

The company is controlled by funds managed by Lone Star Global Acquisitions, Ltd, which, as is often the case in private equity sponsored deals, have a higher tolerance for leverage and governance is comparatively less transparent. Moody's expects Moody's-adjusted debt/EBITDA of 5.6x in 2020 and 5.2x in 2021. Moody's views the presence of a €210 million Holdco loan as aggressive even though the Holdco loan instrument is raised outside the perimeter of the rated group. The rating agency expects that the servicing of cash interest or a redemption of the instrument may result in Skyscraper making payments to Lone Star, which will constrain Skyscraper's ability to deleverage its capital structure. In assigning the B2 CFR Moody's has taken into account the company's ability to generate free cash flows (FCF). Moody's expects FCF of around €124 million in 2020 and €93 million in 2021 supported by low capital spending requirements.

Skyscraper will not produce its first audited annual financial statements until early 2022 for fiscal year 2021. In the interim the company will produce unaudited quarterly financial statements, the first of which becomes available in Q1 2021. The carve-out is expected to be formalized in Q3 2020 and as part of the separation from BASF Skyscraper will have to set up its own internal control systems, the effectiveness of which has yet to be tested. In terms of other ESG considerations, Moody's points out that the cement industry is one of the largest emitters of CO2. Skyscraper's products partially help in reducing the cement content and thus lower the CO2 footprint.

STRUCTURAL CONSIDERATIONS

Moody's rates both the €700 million tranche of the term loan B and the €150 million revolving credit facility (RCF) B2. Both debt instruments rank pari passu with the €775 million ($ equivalent, unrated) term loan that has been privately placed. All term loan tranches and the RCF share the same security and all three instruments represent the vast majority of financial debt in the capital structure of the restricted group. Entities representing a minimum of 80% of consolidated EBITDA will guarantee the senior secured debt.

RATIONALE FOR STABLE OUTLOOK

The outlook is stable and reflects Moody's expectation that Skyscraper strengthens its EBITDA margins as it takes out its high legacy costs. The stable outlook also assumes that the working capital management after closing of the transaction in Q3 2020 results in a seasonally strong inflow of cash that will bolster the company's cash balance. It also takes into account that there will not be a second wave of coronavirus infections and that the global economy is gradually recovering from the outbreak in the second half of 2020 and into 2021.

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

Moody's could upgrade ratings if (1) debt/EBITDA dropped consistently to below 5.0x; (2) the EBITDA margin increased sustainably to above 15%; and (3) FCF/debt consistently in the high single digits (%). Conversely, ratings could be downgraded if (1) debt/EBITDA were to approach 6.0x; (2) EBITDA margins were to fall towards 10%; and (3) the company's liquidity profile deteriorated evidenced by either negative free cash flows or extensive use of its RCF. All metrics reference is Moody's-adjusted.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at http://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.

COMPANY PROFILE

Skyscraper represents the entity that BASF (SE), the parent and current owner, is in the process of carving out and of selling to funds of Lone Star Global Acquisitions, Ltd. Its activities span construction chemical products. Skyscraper has two segments, Admixture Systems (AS) and Construction Systems (CS), representing 46% and 54% respectively of 2019 group sales of around €2.6 billion. The transaction is expected to close in Q3 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, 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 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 https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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

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.

Martin Kohlhase
VP - Senior Credit Officer
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

Matthias Hellstern
MD - Corporate Finance
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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