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Rating Action:

Moody's assigns Ba3 ratings to Avantor's proposed term loans; moves outlook to positive

09 Jun 2011

Approximately $220 million of proposed new credit facilities rated at Ba3

New York, June 09, 2011 -- Moody's Investors Service assigned Ba3 issue level ratings to Avantor Performance Materials Holdings, S.A. (APMH) proposed new $35 million revolving credit facility and $185 million term loan B. We expect APMH to use proceeds from the proposed new credit facility to refinance the amounts outstanding under its current term loan B and to fund the recently announced acquisition of POCH S.A., a laboratory and pharmaceutical business headquartered in Poland. Moody's also moved the rating outlook to positive from stable. Moody's will withdraw the ratings on APMH's existing credit facility and term loan on completion of the transaction.

Outlook Change:

Avantor Performance Materials Holdings, S.A.

Positive from Stable

New Ratings Assigned:

Avantor Performance Materials Holdings, Inc,.

$35 million Sr Sec Gtd Revolver due 2015 -- Ba3 (LGD4, 51%)

$185 million Sr Sec Gtd Term Loan due 2017 -- Ba3 (LGD4, 51%)

Ratings to be withdrawn

Avantor Performance Materials Holdings, Inc,.

$30 million Sr Sec Gtd Revolver due 2015 -- Ba3 (LGD4, 51%)

$145 million Sr Sec Gtd Term Loan due 2016 - -- Ba3 (LGD4, 51%)

RATINGS RATIONALE

As part of the proposed recapitalization, APMH will put into place a new $220 million credit facility composed of a $35 million revolver and a $185 million first lien term loan, which will be used to refinance its existing $185 million combined credit facility. The sponsor, an affiliate of New Mountain Capital, LLC funded its initial acquisition of APMH with $200 million of cash equity and has since contributed an additional $100 million of equity to complete the acquisition of RFCL Ltd., a laboratory and pharmaceuticals business based in India. This equity infusion and the prospect of higher than anticipated cash flows support the move to a positive outlook. APMH's proposed ratings and outlook are subject to review of the final documentation of the financings and closing of the transaction as described.

APMH's Ba3 corporate family rating (CFR) reflects a small but growing revenue base (relative to much larger competitors with better credit profiles), a relatively small amount of tangible net worth (under $140 million) and a limited history operating as an independent company. Adjusted debt (including standard adjustments for unfunded pensions of $6 million and capitalized rents of $7 million) is about $198 million, assuming no borrowings under APMH's revolver. Proforma leverage for the LTM period ending Mar 11, 2011is approximately 2.5 times, which comes in a year with record adjusted EBITDA generation (proforma for the acquisitions) approaching $74 million. Despite its small size relative to competitors, APMH benefits from a favorable brand image, long lived customer relationships, and relatively small but stable order sizes. Many customer orders, which are concentrated in the steady laboratory and pharmaceutical markets, are not subject to corporate expense approvals.

While APMH has a small but growing business profile, the Ba3 rating benefits from the less cyclical nature of the company's specialty chemical revenue base, the equity financed growth from its owner, stable financial performance in recent years, and the prospect of steady free cash flow generation. In addition, the rating recognizes the potential benefits of reduced levels of capital spending, running typically near 3% of sales that should aid in the generation of free cash flow, providing greater financial flexibility. Although the business has traditionally been less cyclical quarter over quarter, variation since its acquisition by NMC has been material with the most recent 4th quarter being much stronger on a year over year basis and the first quarter of 2011 being modestly weaker.

The rating outlook for APMH is positive. Factors that could have positive rating implications include successfully improving financial performance and a sustainable track record of operating with a conservative financial profile, specifically with regard to financing acquisitions. The ratings could be raised, over the next four quarters, as the company establishes a proven track record of operating as a standalone entity while managing and integrating its growth aspirations.

Factors that could have negative rating implications include a failure to maintain historical margins and steadily improve sales over time. While the company is subject to significant customer concentration with distributors this will not likely be a major business risk unless there is deterioration in customer service excellence which would drive clients to competitors. The presence of favorable environmental protection for both on-site and off-site claims is viewed positively. However the need for such support and its relative complexity combined with the inherent uncertainty and surprises surrounding environmental remediation could cause pressure on APMH's credit profile. However as time passes and the environmental issues are successfully executed concerns over unexpected outcomes would be mitigated.

APMH is a focused specialty chemical company that operates in three business segments providing high purity chemicals to laboratories, pharmaceutical companies and microelectronic industries. For the LTM period ending March 31, 2011 business segment revenues totaling $529 million (up from $438 million for June 30, 2010) were split into thirds. Gross profit margins on a combined basis are near 29% but there is variation between the gross margins of the three segments. The microelectronics business has the weakest margins and pharmaceutical the strongest.

The principal methodology used in rating APMH S.A. was Global Chemical Industry published in December 2009. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

The date on which some Credit Ratings were first released goes back to a time before Moody's Investors Service's Credit Ratings were fully digitized and accurate data may not be available. Consequently, Moody's Investors Service provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website www.moodys.com for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
William Reed
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns Ba3 ratings to Avantor's proposed term loans; moves outlook to positive
No Related Data.
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