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Rating Action:

Moody's assigns B3 CFR to Pro Mach following LBO; outlook stable

15 Feb 2018

New York, February 15, 2018 -- Moody's Investors Service, ("Moody's") assigned a B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR) to PM Merger Sub Inc. Concurrently, Moody's assigned B2 ratings to the proposed $100 million first lien senior secured revolver and $760 million first lien senior secured term loan. All ratings for the pre-LBO entity will be withdrawn upon closing of the proposed transaction as all previously rated debt is being refinanced. The rating outlook is stable.

PM Merger Sub Inc. is a new legal entity that has been established as part of a transaction whereby an affiliate of Leonard Green & Partners will acquire a majority stake in Pro Mach Group, Inc. Following consummation of the buyout, PM Merger Sub Inc. will merge with and into Pro Mach Group, Inc. with the latter being the surviving entity. For purposes of this credit discussion, Moody's will refer to PM Merger Sub Inc. and Pro Mach Group, Inc. collectively as "Pro Mach." The transaction is expected to close in March 2018.

Pro Mach will utilize the proceeds from the first lien debt, $340 million of unrated second lien secured notes, and a sponsor contribution of $1.1 billion to fund the approximately $2.2 billion purchase price including transaction fees and expenses. Debt is increasing by roughly 35% in conjunction with the transaction.

"Pro Mach's very high financial leverage -- Moody's expects debt to EBITDA to remain above seven times through 2018 -- coupled with its aggressive debt funded growth strategy position the company weakly in the B3 rating category," says Inna Bodeck, lead Analyst with Moody's. "Strong organic growth prospects, a track record of successfully integrating acquisitions, and the company's adequate liquidity however, ultimately supports the B3 corporate family rating," added Bodeck.

Moody's assigned the following ratings to PM Merger Sub Inc.:

Corporate Family Rating at B3

Probability of Default Rating at B3-PD

$100 million senior secured first-lien revolver due 2023 at B2 (LGD3)

$760 million senior secured first-lien term loan due 2025 at B2 (LGD3)

Stable outlook

The following ratings for Pro Mach Group, Inc. will be withdrawn upon closing of the transaction and the concurrent repayment of debt outstanding:

Corporate Family Rating at B3

Probability of Default Rating at B3-PD

$60 million senior secured first-lien revolver due 2019 at B2 (LGD3)

$670 million senior secured first-lien term loan due 2021 at B2 (LGD3)

Stable Outlook

RATINGS RATIONALE

Pro Mach's B3 CFR broadly reflects the company's very high initial leverage, the cyclical nature of its products and its aggressive acquisitive growth strategy balanced by the company's competitive offerings across a range of equipment, the stability provided by significant revenue contribution from aftermarket products and services, and positive projected free cash flow. Pro Mach operates in the fragmented packaging equipment manufacturing industry and has been very acquisitive since 2006. In the last three years, the company has acquired 12 companies at increasing multiples (an average multiple of 6.5x) and partially financed with debt. Moody's anticipates that debt-to-EBITDA leverage (approximately 8.1x LTM 9/30/2017 post LBO incorporating Moody's standard adjustments) will slowly decline to a low 7.0x in the next 12 months due to the company's strategy of complementing organic growth with partially debt-funded acquisitions where some of the free cash flow that could be used to pay down debt will be used for acquisitions. In spite of financial and integration risk that is high, the company's good organic growth prospects and adequate liquidity support the rating.

The stable rating outlook reflects Moody's expectation that the company's organic revenue growth will continue in the low single digit range and that ProMach will increase its EBITDA margin by 40-50 basis points and reduce the sizable recent cash outlays on integration and restructuring costs over the next 12-18 months such that free cash flow generation will improve despite the increase in cash interest resulting from the LBO. The outlook also factors in Moody's expectation that Pro Mach will use its $100 million second lien acquisition facility (unrated) to fund any bolt-on acquisitions, keeping debt-to-EBITDA leverage elevated at above 7.0 times through 2018.

An upgrade could be considered if the company sustains Moody's-adjusted debt-to-EBITDA leverage below 6.0 times, EBITA-to-interest coverage above 2.0 times, and FCF-to-debt above 5%.

The ratings could be pressured should the company's revenues and margins decline, leading to sustained Moody's adjusted debt-to-EBITDA leverage above 7.5 times or EBITA-to-interest coverage below 1.0 time. A deterioration in liquidity could also lead to a downgrade.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Covington, Kentucky, Pro Mach Group, Inc. and its subsidiaries manufacture a range of packaging equipment and related aftermarket parts and services used primarily in the food, beverage, household goods and pharmaceutical industries. Pro Mach is a portfolio company of financial sponsor Leonard Green & Partners. Pro forma expected revenue for the year ended December 31, 2017 was approximately $832 million.

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.

Inna Bodeck
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

Russell Solomon
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

No Related Data.
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