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Rating Action:

Moody's assigns B3 CFR to Faerch Plast; outlook stable

17 Jul 2017

London, 17 July 2017 -- Moody's Investors Service, ("Moody's") has today assigned a first time B3 corporate family rating (CFR) and B3-PD probability of default rating (PDR) to Roy Midco ApS the ultimate parent of Faerch Plast Group A/S (Faerch or The Company), a leading player in the manufacture of rigid plastic packaging which it supplies into certain high-growth niche food end markets across a limited number of Western European countries.

The rating action takes into account the following factors:

• The high opening Moody's-adjusted leverage with gradual deleveraging prospects

• High ongoing levels of capex weighing on free cashflow

• The company's leading position in niche high growth food packaging markets

• Faerch's long term customer relationships and demonstrated ability to pass through raw material price increases

Concurrently, Moody's assigned a first-time B2 instrument rating to the DKK2,231 million (EUR denominated) first lien secured term loan B1 due 2024, the DKK818 million (GBP denominated) first lien secured term loan B2 due 2024 and the EUR65 million (multicurrency) first lien secured revolving credit facility (RCF) due 2023, borrowed at Roy Bidco ApS.

Proceeds from the term loan will be used to partially finance the acquisition of Faerch by Advent International, repay existing debt facilities and transaction costs as well as provide a DKK100 million cash overfund.

The outlook on all ratings is stable.

RATINGS RATIONALE

Moody's views the rating as strongly positioned in the B3 category, reflecting: (i) the focused product portfolio supplying into high-growth, high-priced segments of the defensive food end market where demand is low-cyclical; (ii) high switching costs for customers given products are often bespoke; (iii) long-term customer relationships and proven ability to pass-through resin price increases; and (iv) the well invested asset base with a high degree of automation resulting in favourable margins compared to peers.

The rating also reflects: (i) the very high Moody's-adjusted opening leverage of around 7.3x for year-end 2016 proforma for the transaction, which Moody's believes will remain elevated for the next 12-18 months reducing to around 6.4x by the end of 2018; (ii) the high level of projected capex which weighs on cash flows; (iii) the high customer concentration level, which is partially mitigated by the long term nature of customer relationships as well as Faerch's proven ability to grow revenues with its main customers; and (iv) the fragmented and competitive market environment in which Faerch operates against a number of significantly larger players.

Faerch is a rigid plastic packaging manufacturer with strong niche market positions in certain Western European countries with a high exposure to the UK and Ireland. The market for rigid plastic packaging is highly fragmented and exhibits strong pricing pressure and fierce competition due to its relatively high growth rate. At higher than GDP rates, rigid plastic packaging is the fastest growing food packaging material. According to the company, between 2010 and 2015 the market in Europe grew at around 4% per annum and is expected to maintain similar growth rates over the next 3-5 years. This forecast is in line with our own projections.

Faerch generates 44% of revenues from European Ready Meals end markets, 31% from the Food-To-Go market and 25% from the European Fresh Meat market segment each of which demonstrated resilience during the last economic downturn.

While Faerch has relatively small scale as measured by revenues relative to rated peers, the company is one of the largest players in its respective markets. Faerch benefits from a well-invested asset base with a high degree of automation, which positions the company as a cost leader in this sector. Faerch's asset base benefits from a sustained high level of capital investment, including into acquired companies, relative to its peers and this is reflected in its relatively high EBITDA margin in 2016.

Faerch has demonstrated a track record of growth. From 2013-16 the company reported organic revenue growth of 5.6% CAGR while growing its EBITDA margin, reflecting its focus on disciplined growth (vs. chasing volumes) and reducing the company's fixed cost base.

Moody's expects deleveraging will be gradual, coming from the company's ability to grow EBITDA at slightly higher than end market growth rates due to its investment in new products, generating operating efficiencies by lowering conversion costs through continuing investment in automation. In addition, Moody's believes EBITDA growth may be generated from modest acquisitions aimed at geographic expansion and based on Faerch's track record of growing its share of wallet with existing customers.

LIQUIDITY PROFILE

Moody's considers Faerch's liquidity, pro forma for the transaction, to be adequate. At closing, the company will have an opening cash balance of DKK100 million (equivalent to EUR13 million) and liquidity is also supported by a DKK483 million (EUR65 million) revolving credit facility which Moody's expects will be sufficient to cover capex and seasonal working capital needs.

The company's high capex spend, which is partly linked to the integration of two acquisitions completed in 2015 of between 8.5% p.a. and 12.7% p.a. of revenues in the last few years weighs on cash flow although maintenance capex amounts to around 2% of revenues with the remainder linked to growth and efficiency projects. Working capital requirements are typically slightly higher in Q3 and Q4 due to inventory build-up, but Moody's does not expect this to have a significant impact on cash flow generation.

RATING OUTLOOK

The stable outlook reflects Moody's expectation that Faerch's leverage, as measured by Moody's-adjusted debt/EBITDA, will decrease to around 6.5x within the next 12-18 months and that management will not embark on any material debt-funded acquisitions, or dividend recapitalisations.

WHAT COULD CHANGE THE RATING UP/DOWN

Positive pressure on the rating could come from continued EBITDA growth so that Moody's adjusted debt/EBITDA falls below 6.0x, combined with free cash flow/debt in the mid-single-digits.

The rating could come under negative pressure if operating performance deteriorates, Moody's adjusted leverage increases to above 7x, free cash flow turns negative, or due to weakening liquidity.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass, and Plastic Containers published in September 2015. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

Headquartered in Holstebro, Denmark, Faerch is a leading rigid plastic packaging manufacturer supplying into the European food industry, with more than 1,000 employees across six manufacturing facilities, and regional sales offices covering all of Europe as well as selected non-European countries. Faerch focuses on the production of plastic trays and its main customers are food producers (80% of 2016 revenue), distributors (16%) and retailers (4%). The company is majority owned by private equity firm Advent International following its acquisition of EQT's 92.7% stake.

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.

Martin Chamberlain
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

Richard Etheridge
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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