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Rating Action:

Moody's assigns B2 to KP's new senior secured notes; Caa2 to new senior notes

28 Jan 2021

London, 28 January 2021 -- Moody's Investors Service (Moody's) has today assigned a B2 instrument rating to the new guarataneed senior secured notes due 2026 issued by Kleopatra Finco S.a.r.l. and assigned a Caa2 instrument rating to the guaranteed senior notes due 2026 issued by Kleopatra Holdings 2 S.C.A (KP, company).

The proceeds are used to refinance the existing senior secured term loans and senior secured revolving credit facility of KP as well as the PIK notes at Kleopatra Holdings 1 S.C.A., a parent of KP and outside the rated restricted group of KP.

RATINGS RATIONALE

The rating reflects the company's high estimated 2020 Moody's-adjusted debt/EBITDA pro-forma for the refinancing, which rises to 7.9x from the actual 6.4x as of the last twelve months to September 2020 due to the refinancing of the PIK notes with additional debt at KP. However, it also reflects the strong progress made during 2020 in improving the company's profitability, leverage and cash flow profile as well as Moody's expectation that the company will remain on a deleveraging path with ongoing positive free cash flow. While the company's recent track record of cost and efficiency improvements as well as growth investments suggest further EBITDA growth potential, future improvements are possibly more challenging to achieve in a competitive industry, with some execution risk, and as the company seeks to further improve margins.

The rating also continues to reflect (1) the ongoing challenge to manage at times volatile raw material prices; and (2) the competitive market environment and some challenges stemming from the consumer- and regulation-driven efforts to improve the sustainability of plastic packaging and possibly transition away from plastic wherever possible, particularly in Europe. However, the rating also considers the company's (1) position as a large and diversified plastic packaging provider in both primary and secondary packaging with a focus on films and, to a lesser extent, trays; (2) different end-markets, including less cyclical end-markets such as food or pharma applications; and (3) balanced geographical profile, although with some focus on Europe. The company also has limited customer concentration.

The company's liquidity position is good and supported by the new fully undrawn and committed €150 million revolving facility due 2025, ca. €88 million on cash on a pro-forma basis as of September 2020, ongoing free cash flow generation and limited seasonality in cash flows. The company will not have any larger debt maturities until 2025/26. The company uses a range of non-recourse factoring facilities with €189 million outstanding as of September 2020. After renewals earlier in the year the facilities are all committed for several years. The company also has local facilities (€74 million as of September 2020 of which €11 million are due within the next 12 months). There is a one financial maintenance covenant related to the RCF, which is only tested if the RCF is drawn by more than 40% (net of cash), and Moody's expects the company to maintain sufficient headroom under this covenant (if it were to be tested).

The guaranteed senior secured notes rating at B2 is one notch above the CFR, as, together with the senior secured bank debt, it ranks ahead of the senior notes in the capital structure. The security package includes comprehensive security in the US and UK, amongst other, and actual guarantor coverage above 70% as of and for the nine months to September 2020 (further tested annually). The guaranteed senior notes rating at Caa2 reflects the notes' subordination to a substantial amount of secured debt.

The stable outlook reflects Moody's expectation of gradual EBITDA growth, deleveraging and solid free cash flow generation.

For detailed rating considerations, please also refer to the press release dated 27th January 2021[1].

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

The rating could be upgraded if the company manages to reduce its Moody's-adjusted debt/EBITDA sustainably below 6.5x (including factoring), combined with Moody's-adjusted free cash flow/debt at least in the mid-single digits in percentage terms. Conversely, weakening profitability and free cash flow so that leverage fails to decline from near 8.0x or FCF/debt reduces substantially could lead to a downgrade. Weakening liquidity would also pressure the rating.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass and Plastic Containers Methodology published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236221. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Kleopatra Holdings 2 S.C.A. is a plastic packaging manufacturing firm that specialises in the manufacturing of flexible plastic films and rigid plastic trays for use across a wide range of end markets, including in its Pharma, Health and Durables division for blister packs, medical device packaging, consumer applications including labels, credit card films, graphics and home, building and construction and in its Food Packaging division for protein, fruit & produce and food-to-go. Total annual revenue on an LTM September 2020 basis was €1.8 billion with PHD company-adjusted EBITDA representing 61% and FP 39% for the last twelve months to September 2020. The majority of revenue (58%) was generated in Europe, but also around a quarter in North America and the rest across the world including South America and the Asia Pacific region. Strategic Value Partners has been the majority shareholder of the group following a financial restructuring and subsequent recapitalisation in June 2012.

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_1243406.

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.

REFERENCES/CITATIONS

[1] https://www.moodys.com/research/Moodys-assigns-B2-to-KPs-new-senior-secured-debt-and--PR_439483 27-Jan-2021

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.

Tobias Wagner, CFA
VP - Senior Credit Officer
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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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