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Rating Action:

Moody's assigns Ba3 rating to Progroup's EUR150 million tap issuance to existing senior notes

11 Jun 2019

Frankfurt am Main, June 11, 2019 -- Moody's Investors Service ("Moody's") has today assigned a Ba3 rating to the proposed EUR150 million tap to its existing EUR450 million senior secured notes due in 2026. Progroup AG's Ba3 corporate family rating (CFR) and all other instrument ratings remain unaffected. The outlook is stable.

The proceeds from the proposed tap issuance will be used to redeem the outstanding equivalent of the existing EUR150 million senior secured floating rate notes maturing in 2024. The refinancing will extend Progroup's debt maturity profile, but will not affect its leverage. Hence, the company's Ba3 CFR remains unaffected.

RATINGS RATIONALE

The Ba3 rating assigned to Progroup's proposed tap issuance to its existing senior secured notes is in line with the company's Ba3 CFR. This is primarily because senior secured debt constitutes the vast majority of the company's outstanding liabilities and there is only a EUR50 million super senior revolving facility that ranks ahead of the bonds in our Loss Given Default waterfall. The guarantor pool is strong and initially consists of all material subsidiaries representing 90.2% of revenue, 99.5% of EBITDA and 96.4% of assets. The notes are secured by first-ranking liens over the shares of the issuer, certain property, certain bank accounts, and certain fixed and other assets.

Following a strong finish in 2018 with credit metrics that position Progroup strongly in the Ba3 category, such as EBITDA margin of around 29%, gross debt/EBITDA around 2.5x, RCF/debt of approximately 20% (all as adjusted by Moody's), and with a strong cash buffer (EUR148 million of cash and cash equivalents as of end-December 2018), this leaves Progroup with sizeable headroom for operational underperformance as well as debt-funded growth.

There is a risk, however, of a temporary increase in Progroup's leverage in the next two to three years. Progroup is considering to build four new corrugated plants in Europe, aiming to increase the annual capacity to 4,200 million m2 from 3,000 million m2 currently, a reflection of the strong growth in its markets. Given that during 2018 Progroup will already become a net purchaser of recycled containerboard, the company therefore, is currently already building a containerboard mill with an annual capacity of 750,000 tonnes with estimated costs of EUR465 million. These sizeable investments are likely to be at least partially debt financed, which could put Progroup's leverage under pressure, especially at times when the new capacity will be ramping up, thereby diluting margins, which are currently among the strongest in the paper-packaging industry.

However, the rating agency believes that Progroup's Moody's adjusted debt/EBITDA will unlikely increase sustainably over 4.0x should the company pursue its expansion plans, which is still well in line with a Ba3 rating. Progroup has built a track record of deleveraging in the past, both through EBITDA expansion, but also through actual debt repayments from cash flow generation, which benefits from high profitability, fairly low maintenance capex needs (roughly 2% of sales) and no further dividend payments to the family owners, whom we expect to continue being supportive. Also, Progroup's commitment to keep its reported net leverage in the range of 2.5-3.0x (1.9x for 2018) in medium term indicates the company's willingness to deleverage if needed.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects the rating agency's expectation that Progroup will be able to keep Moody's adjusted EBITDA margins at around 20% and Moody's adjusted debt/EBITDA largely below 4.0x during its capacity expansion over the next two to three years.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on the ratings could develop if Progroup is able to (i) maintain a Moody's-adjusted EBITDA margin at least in the high-teens in percentage terms, (ii) Moody's-adjusted debt/EBITDA moves towards 3.0x, generate sustainable Moody's-adjusted RCF/debt of around 20%, and (iii) maintains a well-managed liquidity profile.

Likewise, downward pressure could arise if the company experiences (i) Moody's-adjusted EBITDA margin moving towards the mid-teens in percentage terms, (ii) Moody's-adjusted debt/EBITDA moving above 4.0x for an extended period, and (iii) a deteriorating liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Paper and Forest Products Industry published in October 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Landau, Germany, with sales of around EUR966 million in 2018, Progroup is one of the leading European paper-based packaging companies, focusing on the production of containerboard, primarily testliner and fluting, and its conversion into corrugated board. The company owns two containerboard mills and 10 corrugated board plants (additional one is under construction) across six European countries, as well as one combined heat and power plant (CHP) in Eisenhüttenstadt, Germany, employing a workforce of around 1,100 employees. The company is family owned and Juergen Heindl, who founded Progroup in 1992, is its CEO.

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.

Dirk Steinicke
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke Rindermann
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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