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Related Issuers
Rating Action:

Moody's assigns Ba3 to Valvoline's new notes

10 Feb 2020

New York, February 10, 2020 -- Moody's Investors Service, ("Moody's") assigns Ba3 to Valvoline Inc.'s new senior unsecured $500 million notes due 2030. 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 $375 million of the existing 5.5% senior unsecured notes due 2024 and add to balance sheet cash to be used for general corporate purposes. The outlook on the ratings is stable.

"The financing is a logical step at this point in the credit cycle as it reduces the company's interest expense and cost of debt capital while pushing out the maturity profile," according to Joseph Princiotta, SVP at Moody's. "However, the new notes will increase adjusted gross leverage slightly to 3.9x on a pro forma basis -- we expect leverage to trend back to the mid 3.0x range to better support the current ratings and outlook" Princiotta added.

Assignments:

..Issuer: Valvoline Inc.

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

Ratings Unchanged:

..Issuer: Valvoline Inc.

....Senior Unsecured Regular Bond/Debenture, Ba3 (LGD5 from LGD4)

RATINGS RATIONALE

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 guided EBITDA up slightly to $495-$515 million range for 2020 on its recent 1Q earnings call reflecting moderating promotional pressure from private label as well as cost reduction efforts and despite base oil cost headwinds.

As of 31 December 2019, Valvoline's credit metrics were supportive of the rating with adjusted leverage (Debt/EBITDA) of roughly 3.7x and Retained Cash Flow/Debt (RCF/Debt) of roughly 17%. Pro forma for this transaction we expect adjusted gross leverage to increase slightly to 3.9x while net leverage will be initially unchanged. We continue to expect M&A activity and share repurchase 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 Valvoline to have adequate liquidity including the $475 million committed revolver with virtually full availability as of December 31, 2019, roughly $162 million in balance sheet cash, or $262 million in cash on a pro forma basis, and positive free cash flow from operations, excluding M&A activity that might arise. Maintenance covenants on the revolver include gross leverage (maximum 4.5 times) and coverage (minimum 3.0 times) tests with ample cushion expected on a one year forward basis. The company also has access to a $175 million accounts receivable securitization facility. As of December 31, 2019 there are no near-term facilities with outstanding balances.

The most significant ESG issue stems from the longer term trend in 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.

Prospects for an upgrade are currently limited given the importance of M&A in the growth of the quick lubes segment, as well as the limited track record as an independent company. 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 leverage to rises significantly above 3.5 times or if retained cash flow to debt falls below 10%, on a 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. 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, 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.

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
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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