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Rating Action:

Moody's assigns Ba1 to Axalta's new term loan

12 May 2017

New York, May 12, 2017 -- Moody's Investors Service, ("Moody's") assigns Ba1 ratings to the $450 million incremental senior secured first lien term loans of Axalta Coating Systems Ltd.'s wholly owned subsidiaries -- Axalta Coating Systems Dutch Holding B B.V., and the co-borrower, Axalta Coating Systems U.S. Holdings Inc. The proceeds from the new term loans will be used to finance the acquisition of assets related to Valspar's North American Industrial Wood Coatings business for $420 million and to pay transaction-related expenses. The transaction, which is subject to the closing of the Valspar Corporation and the Sherwin-Williams Company merger as well as customary regulatory approvals, is expected to close mid-year. Valspar is required to divest the assets to satisfy regulators related to the pending acquisition of Valspar by Sherwin-Williams.

"The acquisition is a good strategic fit with Axalta's Performance Coatings segment and is consistent with Axalta's competencies, technology and geographic presence," according to Joseph Princiotta, VP, Senior Credit Officer at Moody's. "The acquisition, which does not overly stress the balance sheet, also facilitates diversification away from the auto OEM market and supports growth in Axalta's industrial coatings business."

Axalta Coating Systems Dutch Holding B B.V (co-issuer Axalta Coating Systems U.S. Holdings Inc)

....Assignment

....Senior Secured 1st Lien Term Loan B due 2024, Assigned Ba1 (LGD2)

RATINGS RATIONALE

The acquired wood coatings business had revenues of roughly $225 million in 2016 and is a leading producer of wood coatings to the OEM and aftermarket industrial wood markets, including building products, cabinetry and furniture in North America. As part of the transaction, Axalta will acquire two manufacturing sites as well as R&D assets, branded products, personnel and the underlying intellectual property of Valspar's NA Industrial Wood Coatings business. The transaction will add about a half a turn to Axalta's gross leverage, which was near 4 times (including Moody's adjustments) at year end 2016 but is projected to recover to this level by year end 2017, pro forma for the acquired wood products business.

Axalta's Ba3 CFR reflects leading positions in performance and transportation coatings, strong margins overall but especially in the refinish segment, highly competitive technology, geographic diversity, and long and stable customer relationships. The rating also reflects Moody's expectations for further operational improvements, despite the recent and near-term foreign exchange headwinds, that support Axalta's credit profile and the rationale for the CFR, which was upgraded to Ba3 in August of 2016. The upgrade reflected the company's strong margin growth, positive free cash flow, steady debt reduction and metrics improvement over the last few years, Moody's added.

Factors constraining the ratings include what is still relatively high leverage (despite the meaningful improvement on this front), significant exposure to the cyclical OEM automotive industry, exposure to raw material price swings, and material Euro and Chinese Yuan exposure.

Positive free cash flow has allowed for debt reduction; total debt has been reduced by over $300 million over the last two years to $3,264 million at December 31, 2016. Over this same time period, Axalta has improved its adjusted EBITDA margin by several percentage points to 22.3% at December 31, 2016. Moody's notes Axalta's board approved a $675 million share buyback program in February 2017; the pace at which this program is used could impact the pace of further debt eduction and leverage improvement. The program has no expiration date.

Moody's believes that Axalta is likely to experience favorable operating trends over the next several years, assuming a stable macroeconomic environment and new auto builds at a pace consistent with industry consensus of roughly 2-3% global growth. Moody's believes that further sales and profit growth is possible from ongoing productivity improvements and modest volume growth resulting from new contract wins, market share gains, robust investment in R&D and select market penetration into previously underserved markets. Completion of a new manufacturing site in Argentina in 2016 and new manufacturing projects underway in China and India should support additional volume growth, Moody's added.

Axalta's liquidity profile is excellent due to the company's undrawn $400 million revolver, cash balances of roughly $535 million, and projected positive free cash flow generation. Moody's does not expect any drawings (aside from L/Cs) on the revolver over the next 12 months, barring additional acquisitions of meaningful scale.

The stable outlook reflects Moody's expectation that Axalta will continue to achieve earnings and EBITDA growth going forward, organically and from additional bolt-on acquisitions, and to continue to generate positive free cash flow for further debt reduction. The company is targeting net leverage of 2.5-3.0x (which roughly equates to Moody's adjusted gross leverage of 3.6x-4.1x at current cash balance levels).

Moody's could upgrade the ratings if leverage (including Moody's adjustments) were to fall sustainably below 3.5x, retained cash flow to adjusted debt is sustained above 15%, and free cash flow to adjusted debt is sustained at low double-digit rates.

A downgrade is unlikely given Moody's current view of the company and its metrics and end markets. However, negative surprises that alter the fundamentals in the auto OEM or refinish markets and result in sustainable leverage approaching 4.5x could cause Moody's to reconsider the appropriateness of the Ba3 rating.

The assigned Ba1 rating on the new senior secured term loans, at two notches above the CFR, is not well-positioned in the Ba1 category and would likely drop to one notch above the CFR in the event new secured debt is added to the capital structure, or if total debt fails to trend lower overtime. The incremental term loans of $450 million increase the secured debt in the capital structure to roughly $2.4 billion and notches the ratings on the roughly $1.4 billion in unsecured notes down to B1, which is also not well-positioned at one notch below the CFR and would also likely be downgraded, for the same reasons.

The principal methodology used in this rating was Global Chemical Industry Rating Methodology published in December 2013. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

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.

Joseph Princiotta
VP - Senior Credit Officer
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

Brian Oak
MD - Corporate Finance
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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