First-time rating assignment
Milan, April 13, 2011 -- Moody's Investors Service has today assigned a first-time
B2 corporate family rating (CFR) and probability of default rating (PDR)
to GCL Holdings, holding company of Guala Closures S.p.A.
("Guala" or "the group"). Concurrently,
Moody's has assigned a provisional (P)Caa1 (loss-given default
(LGD5 -- 84%) rating to the group's proposed issuance
of EUR200 million worth of senior unsecured bond. The outlook on
the ratings is stable. This is the first time Moody's has
assigned ratings to Guala Closures.
Moody's issues provisional ratings in advance of the final sale
of securities and these ratings reflect Moody's preliminary credit
opinion regarding the transaction only. Upon a conclusive review
of the final documentation, Moody's will endeavour to assign
a definitive rating to the notes. A definitive rating may differ
from a provisional rating.
"The B2 CFR assigned to Guala reflects its relatively small size
overall in relation to its much larger and consolidated customer base,
as well as its weak credit metrics, which are nevertheless mitigated
by Moody's expectation that the group will gradually de-leverage
and maintain a conservative financial profile," says Paolo
Leschiutta, a Moody's Senior Analyst -- Vice President
and lead analyst for Guala.
"However, more positively, the B2 rating also reflects:
(i) the sound business profile of the group thanks to its market-leading
position in safety closures for the spirits industry; (ii) the growing
potential offered by the increasing penetration of safety closures in
emerging markets; and (iii) the group's relatively stable operating
performances despite its exposure to raw material prices,"
adds Mr Leschiutta. All in all Moody's sees Guala's
rating as strongly positioned in its rating category and a track record
of sustained profitability and positive free cash flow that had to lead
to a gradual reduction in financial leverage might result in positive
pressure on the rating overtime.
Guala enjoys a market-leading position in the growing segment for
safety closures, which are used to prevent spirits bottles being
refilled in order to avoid the sale of counterfeit products and also offer
evidence of tampering. Safety closures represented around 55%
of group revenues as at fiscal year ended (FYE) December 2010.
Given the technology involved and the patent protection on most of Guala's
products, Moody's views safety closures as value-added.
In addition, the rating agency recognises that Guala enjoys a degree
of recurring revenues, given that (i) the group's safety closure
division benefits from long-term contracts; and (ii) closures
are incorporated into the design of spirits bottles and, in turn,
into the marketing campaigns of the spirits brands. As well as
this, involving key customers in the launch of new closures provides
for a further degree of customer loyalty. Furthermore, Guala
benefits from long-lasting relationships with most of its customers
and the reliability of its products is well known. Along with safety
closures, the group also produces standard closures for spirits
and wine screw caps, which Moody's sees as more commoditised
products, although standard closures provide an entry point for
potentially upselling customers to safety closures.
However, Guala's operating profitability is exposed to a highly
concentrated customer base and to the volatility of raw material prices,
particularly for aluminium and plastic. Despite Guala's key
trends being somewhat distorted by the numerous acquisitions it has made
in the past, the group's historical operating performances
indicate a degree of resilience to raw material price increases in recent
years and its success in negotiating with key customers.
Moody's would expect Guala's key credit metrics to remain
in line with a mid single-B rating. In particular,
as at FYE December (including the mezzanine debt at holding company level)
2010 Guala's financial leverage, measured as debt/EBITDA (adjusted
for operating leases), stood at 5.2x and EBIT interest coverage
at 1.5x. Although going forward we would expect a gradual
improvement in credit metrics, this is not expected to be significant.
Improvements are likely to result from a 15 million capital injection
completed in March 2011 to finance investment in a new facility in India
and other machinery and equipment, and the expectation that the
company will continue to generate stable operating performances and positive
free cash flow. The company intends to use the proceeds from the
bond issue to repay the existing mezzanine debt and part of its senior
bank facility, which should also result in modest reduction in interest
payment given the high coupon (including a PIK component) on the mezzanine
debt. Any significant improvements in credit metrics might result
in upward pressure on the rating.
The ratings are also supported by a satisfactory liquidity profile,
given Guala's modest refinancing needs over the short to medium
term and the availability under a EUR40 million revolving credit facility.
Moody's notes that the existing revolver, together with the
remaining portion of bank facility, contain financial covenants
that limit the reliability of these lines. The rating agency understands
that, as part of these transaction, covenants have been reset
and currently offer satisfactory headroom.
The stable outlook on the ratings reflects Moody's expectation that
Guala will continue to grow while maintaining a conservative financial
policy and will gradually improve its key credit metrics, benefitting
from the growing penetration of safety closures and wine caps.
Upward pressure on the rating could result from the company's success
in improving operating profitability leading to a financial leverage well
below 5x together with an EBIT interest cover above 2x. Conversely,
a rating downgrade could result from deteriorating operating profitability
preventing the company from improving key credit metrics, that would
result in financial leverage increasing towards 6x or negative free cash
flow would result in a rating downgrade. The rating does not assume
any large debt financed acquisition.
The principal methodology used in rating GCL Holdings S.C.A.
and Guala Closures was the Global Packing Manufacturers: Metal,
Glass, and Plastic Containers Industry Methodology, published
June 2009. Other methodologies used include Loss Given Default
for Speculative Grade Issuers in the US, Canada, and EMEA,
published June 2009.
Guala is a one of the world largest producers of closures for the spirits
and wine industries, with market-leading positions in the
safety closures and wine screw-cap segments. The company
generated revenues of around EUR371 million and EBITDA of EUR81 million
(22% margin) in FYE December 2010. Located in Italy,
Guala generates a significant proportion of its revenues in Western European
markets (41% of 2010 revenues by production facility).
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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Vice President - Senior Analyst
Corporate Finance Group
Moody's Italia S.r.l
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
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Moody's Italia S.r.l
Moody's assigns B2/(P)Caa1 ratings to Guala Closures; stable outlook (Italy)
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