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Rating Action:

Moody's assigns Ba3 CFR to Taghleef, stable outlook

14 Apr 2016

London, 14 April 2016 -- Moody's Investors Service ("Moody's") has today assigned a corporate family rating (CFR) of Ba3 and a Ba3-PD Probability of Default rating (PDR) to Taghleef Industries Topco Limited ("Taghleef"). Concurrently, Moody's has also assigned Ba3 instrument ratings to the new senior secured US$325 million equivalent term loan and US$80 million equivalent revolving credit facility, borrowed at Taghleef B.V. and other subsidiaries. The outlook is stable. This is the first time Moody's has assigned a rating to Taghleef.

Taghleef seeks to simplify its capital structure through this refinancing transaction following growth and geographic expansion over the last years.

RATINGS RATIONALE

Moody's views the Ba3 rating as weakly positioned, reflecting (i) the focused product portfolio on BOPP films and labels for predominantly food/beverage end markets; (ii) exposure to raw material price volatility as pass-through arrangements do not cover all sales, and in fact will pressure EBITDA in 2016; (iii) exposure to more commoditized products for which Taghleef needs to balance pricing pressure from large customers with volume growth; (iv) the need to invest in operations to further develop value-added products to protect and improve margins, and to improve operating efficiencies, which is expected to turn free cash flow negative initially and carries some execution risk; and (v) the company's acquisitive past and room for further debt-funded acquisitions under its existing credit facilities. We also note that Moody's adjusted leverage stood at 3.6x pro-forma for the new capital structure and as of December 2015.

However, the rating also reflects the company's good market positions in the BOPP packaging segment, its broad and balanced geographic reach across North America and the EMEA region, and the typically low cyclicality of food end markets. The company also benefits from its ability to cost efficiently produce less value-added products in its lower cost locations, supported by cheap labor cost and its long-standing relationships with local suppliers, while producing the most advanced products nearer to the end markets. Moody's also views positively the company's efforts to further shift its product portfolio towards value-added products, diversify its end markets into other consumer goods segments and its pro-active investment in its facilities, which should be well invested. The liquidity profile, focus on deleveraging and expectation of no dividend payments also support the rating.

In the BOPP market, Taghleef is among the largest producers by volume globally together with India-based Jindal Poly Films and Taiwan-based Nan Ya Plastics, although the market remains very fragmented and highly competitive given that a significant part of the market consists of commoditized products. In the broader packaging market the company also competes with more diverse and larger players, that achieve better margins. Moody's views its balanced regional profile with a focus on Europe (45% of 2015 revenues), Americas (mainly North America; 37%) and the MEA region (12%) together with its continued efforts to increase its share of value-added and specialty products as supportive for the rating. The company also has a broad manufacturing base with manufacturing sites spread across 9 countries, which Moody's understands are well invested.

Polypropylene resin is Taghleef's main raw material. The company operates under monthly pass-through arrangements for around 35% of its global sales, with a larger relative share in the US. Moody's would still expect some lag effect to introduce meaningful margin volatility. For example, the falling oil prices in 2015 contributed to the company's improvements in its reported EBITDA margin to 11.9% from 8.8% in 2014, amongst other factors.

Moody's notes that the company's ability to grow EBITDA organically will depend on the success of its large planned, but uncommitted, growth investment projects that carry execution risks and turn free cash flow negative initially, notwithstanding the company's investment track record. While the company may be in a position to gradually deleverage from organic EBITDA growth over time, Moody's expects some EBITDA headwinds and uncertainty in 2016 as lower oil prices feed through to customers with leverage potentially increasing above 3.6x temporarily. Some deleveraging will also come from the limited debt amortization under the Egyptian facility, although Moody's expects that the large growth investments will turn free cash flow initially negative and absorb essentially all operating cash flows until at least 2017. Moody's understands that investments are not fully committed and can be scaled back if needed. Taghleef has also grown partly through acquisitions in the past and Moody's would expect the company to assess acquisition opportunities as they arise, for example to extend its geographic profile or complement its product portfolio. Any transaction could be debt-funded given the availability under its US$80 million revolving credit facility and US$50 million additional facilities basket under the senior facilities agreement. However, the rating does not incorporate any debt-funded acquisitions.

The instrument ratings of Ba3 for the US$325 million equivalent term loan and US$80 million equivalent revolving credit facility, in line with the CFR, are reflective of the facilities' pari passu nature. The 50% family recovery rate and resulting Ba3-PD mainly reflect Moody's recovery assumptions for the capital structure.

LIQUIDITY PROFILE

Following the refinancing, Moody's expects Taghleef to have US$93 million of cash on the balance sheet and access to a US$80 million equivalent undrawn revolving credit facility due 2022. For 2016 and 2017, Moody's also expects the company to generate negative or no free cash flow after growth investments. Given the company's initially negative free cash flow profile Moody's views the liquidity buffer as supportive for the rating. There will also be ca EUR2.6 million (US$2.9 million) annual debt amortization related to the Egyptian local facilities. The company is subject to one financial maintenance covenant under which Moody's expects the company to retain good headroom.

RATING OUTLOOK

The stable outlook reflects our expectation that Taghleef's operating performance, including EBITDA and margins, will weaken slightly in 2016 as lower resin prices fully feed through to customers, with some potential for growth thereafter from its planned investments.

WHAT COULD CHANGE THE RATING UP/DOWN

While Moody's does not expect upgrade pressure in the near-term, positive pressure on the ratings could develop over time if the company's Moody's-adjusted EBITDA margin moves towards 15% and Debt/EBITDA falls below 3.0x on a sustainable basis, combined with further strengthening of Taghleef's market position, a greater share of high value added products, significant diversification into different end markets or possibly substrates. In any case, Moody's would also expect the company to maintain a good liquidity profile and achieve sustained free cash flow to debt of above 5% for upgrade pressure.

Negative pressure on the rating could develop if the company's Moody's-adjusted EBITDA margin were to weaken from current levels, or if Debt/EBITDA increases above 4.0x. Weakened liquidity or covenant headroom, negative free cash flow beyond 2016, material debt-funded acquisitions or dividends could also pressure the ratings.

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

Headquartered in Dubai, Taghleef Industries Topco Limited (Taghleef) is a manufacturer of biaxially oriented polypropylene (BOPP) films with nine manufacturing sites spread across North America and the EMEA region. Taghleef's films are mostly for food packaging or labeling, but are also increasingly used for other non-food consumer goods. The company mainly sells to converters, but also directly to consumer goods companies. It is ultimately owned by the Al Ghurair Group, a conglomerate owned by the Al Ghurair family. In the year ending December 2015, the company generated revenues of AED3.3 billion (in US$: 901 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.

Tobias Wagner
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
SUBSCRIBERS: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns Ba3 CFR to Taghleef, stable outlook
No Related Data.
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