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Rating Action:

Moody's assigns Ba3 to Valvoline's add-on senior unsecured notes

08 May 2020

New York, May 08, 2020 -- Moody's Investors Service, ("Moody's") assigns Ba3 to Valvoline Inc.'s ("Valvoline") new $300 million senior unsecured notes, which are an add-on to the 4.375% senior unsecured notes due 2025. The ratings are one notch below the company's CFR rating of Ba2 reflecting the priority of the senior secured tranche of term loan debt in the capital structure. Proceeds from the issuance will be used to repay $300 million outstanding under the revolver, $450 million of which was drawn in March to shore up liquidity during the COVID crisis. The outlook on the ratings is stable.

"The step up in gross debt from the recent draw on the revolver, repaid with this debt issuance, increased gross adjusted leverage but left net adjusted leverage roughly unchanged in the mid 3x range, supporting the Ba2 CFR ratings," according to Joseph Princiotta, SVP at Moody's. "The company's large cash balance of $775 million currently supports strong liquidity during these uncertain times, but beyond the covid crisis we expect cash to be used to reduce gross debt leverage to the mid-to-high 3x range, acceptable but potentially slightly stressed for the ratings. Moody's expects to see gross adjusted leverage trend to the mid 3x range to support the ratings as EBITDA recovers" Princiotta added.

Assignments:

..Issuer: Valvoline Inc.

....Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD5)

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The chemical sector in general and auto lube subsector in particular have been affected by the shock, especially the auto markets and lube oil demand given the sensitivity to consumer demand and auto miles driven. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's commentary, in part, reflects the impact on Valvoline and the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Valvoline's credit profile reflects its leading market positions in retail (conventional and synthetic) passenger car lubricants, the quick lube DIFM (Do It For Me) market, and the distributor and direct installer service markets in the US. The ratings also reflect strong and relatively stable margins in this mostly recession resistant space, which is largely tied to miles driven and requirements for periodic oil changes in the auto and truck markets.

The ratings also reflect increasing capex and the growing importance of acquisitions to support growth in the instant Oil change (IOC) Quick Lube segment and to offset competitive and secular pressures in the other two segments, including the impact of the longer term decline trend due to growth of electric vehicles (EVs). More immediate trends include the benefit to the Core NA and International segments from the growing share of synthetic oils in new vehicles, but this has been recently offset by volume pressure due to price differences versus less expensive private label brands. The company has suspened guidance in light of the uncertainty created by the covid crisis, but Moody's expeects EBITDA could be down in the low $400 million range for 2020.

As of 31 December 2019, Valvoline's credit metrics were supportive of the rating with adjusted gross leverage (Debt/EBITDA) of roughly 3.7x and Retained Cash Flow/Debt (RCF/Debt) of roughly 17%. But in the fiscal 2Q March quarter the revolver drawdown increased debt and adjusted gross leverage is closer to 5.0x while net leverage was unchanged at roughly 3.5x.

We expect M&A activity and share repurchases to be modest this year, but beyond the covid crisis we expect M&A activity to be financed with free cash flow and in some cases additional debt leaving leverage mostly unchanged in the mid 3x range as EBITDA grows. We expect leverage to trend back to the mid 3x range overtime, mainly through EBITDA growth.

We expect Valvoline to have strong liquidity during the covid crisis including substantial balance sheet cash of roughly $775 million at March 31, 2020. Pro forma for this new bond issuance, oustandings under the $475 million revolver are expected to be roughly $150 million. We expect the company will use balance sheet cash at some point to restore the revolver to its full availability. We also expect modest free cash flow from operations, despite the pressure on EBITDA this year from the covid crisis. Maintenance covenants on the revolver include a Net Leverage test (maximum 4.5 times) and Coverage test (minimum 3.0 times) with ample cushion expected on a one year forward basis. The company also has access to a $175 million accounts receivable securitization facility, which had $90 million outstanding as of March 31, 2020.

ESG factors are not material to the credit profile at this time. The most significant ESG issue stems from the longer term trend in electric vehicles (EVs), which use far less engine lubes than conventional internal combustion engine (ICE) vehicles and represent a long term headwind to demand for the company's products. However, significant penetration by EVs is likely still many years away, and the total global count of existing vehicles, which will continue to grow and require periodic oil changes, will remain substantially larger than new vehicle sales for decades to come. Social issues, while high in profile given the connection with the transportation space and its carbon footprint, are still viewed as only modest in the credit profile due to the very long tail that lube products are expected to sustain, albeit against secular demand pressure. As a public company, governance issues are also viewed as modest and supported by what has thus far been adherence to conservative financial policies.

The stable outlook anticipates leverage remaining at or below 3.5x and RCF/Debt to remain near or above 20% for the foreseeable future, excluding the impact from additional acquisitions. The ratings also anticipate small to moderate bolt-on acquisitions that do not spike leverage substantially above 3.5x on a sustained basis, or with a delayed recovery in leverage following larger acquisitions.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Prospects for an upgrade are currently limited given the pressure on earnings from the covid crisis, as well as the importance beyond covid of M&A in the growth of the quick lubes segment. However, successful execution in profitable store growth in the quick lube segment and overall margin stability and expansion could eventually support a higher rating if adjusted leverage were to sustainably fall below 2.5 times. We could consider a downgrade if adjusted gross leverage is not restored closer to 3.5 times or if retained cash flow to debt falls below 10%, on a post covid sustained basis; due to a shift in financial policies, poor performance, aggressive share repurchases, or if acquisitions that cause leverage to spike meaningfully above 3.5x with delayed recovery.

Valvoline Inc., headquartered in Lexington, Kentucky, is a marketer of premium-branded automotive and commercial lubricants. The company sells its products through over 30,000 retail outlets and about 1,350 franchised and company-owned stores. Its three business segments are Core North America (39% of sales), which includes "Do-It-Yourself" (DIY), "Do-It-For-Me" (DIFM), and commercial and industrial (C&I); Quick Lubes (37% of sales); and International (24% of sales), which includes passenger and heavy duty branded products sold to about 140 countries outside the US and Canada. The company has revenues of over $2.44 billion for the December 31, 2019 LTM period.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/research/Chemical-Industry--PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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
Senior Vice President
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

Glenn B. Eckert
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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