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Rating Action:

Moody's assigns Flex Acquisition B2 CFR with negative outlook, rates acquisition financing

08 Jun 2018

Approximately $4.6 billion of debt affected

New York, June 08, 2018 -- Moody's Investors Service ("Moody's") assigned the B2 corporate family rating and the B2-PD probability of default rating to Flex Acquisition Company, Inc. (doing business as Novolex). Moody's also confirmed the company's senior secured instrument rating at B1 and senior unsecured bond rating at Caa1. The rating action completes the review initiated on May 4th, 2018 after the company announced that it had signed a definitive agreement to acquire The Waddington Group from Newell Brands Inc. for $2.275 billion. At the same time Moody's withdrew the B2 corporate family rating and B2-PD probability of default rating and outlook at Flex Acquisition Holdings, Inc. and assigned ratings to the acquisition financing at Flex Acquisition Company, Inc. (see debt list below). The acquisition is expected to close by July of 2018. The ratings outlook is negative.

"The negative outlook reflects the transformative and leveraging nature of the Waddington acquisition, as well as ongoing acquisition and integration risk," said Anastasija Johnson, VP -- senior analyst at Moody's. "The company needs to pay down debt with debt/EBITDA tracking to 6.5 times by mid 2019 to maintain its rating."

Confirmations:

..Issuer: Flex Acquisition Company, Inc.

....Senior Secured Bank Credit Facility; Confirmed at B1 (LGD3)

....Senior Unsecured Regular Bond/Debenture; Confirmed at Caa1 (LGD5)

Assignments:

..Issuer: Flex Acquisition Company, Inc.

.... Probability of Default Rating, Assigned B2-PD

.... Corporate Family Rating, Assigned B2

....Senior Secured Bank Credit Facility, Assigned B1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Assigned Caa1 (LGD5)

Outlook Actions:

..Issuer: Flex Acquisition Company, Inc.

....Outlook, Changed To Negative From No Outlook

..Issuer: Flex Acquisition Holdings, Inc.

....Outlook, Changed To Rating Withdrawn From Rating Under Review

Withdrawals:

..Issuer: Flex Acquisition Holdings, Inc.

.... Probability of Default Rating, Withdrawn , previously rated B2-PD

.... Corporate Family Rating, Withdrawn , previously rated B2

RATINGS RATIONALE

The B2 corporate family rating (CFR) reflects high leverage pro forma for the acquisition, continued acquisition risk and lack of meaningful track record of debt repayment. Pro forma for The Waddington Group acquisition, which will be primarily funded with debt, Novolex's leverage as adjusted by Moody's was 7.1 times in the twelve months ended March 31, 2018, excluding synergies, and 6.8 times with synergies. The sponsor, The Carlyle Group, and management will contribute $500 million of new equity to fund the transaction, but it will still be leveraging given a high 12 times EBITDA multiple it agreed to pay for The Waddington Group. The Waddington transaction is the eighth acquisition for Novolex since 2012 and the company will likely continue to pursue other acquisitions, which could further stretch leverage metrics. The proposed capital structure includes an upsized $500 million revolver and ability to issue incremental facilities of the greater of: $350 million and 100% of consolidated EBITDA or the unlimited amount as long as first lien leverage ratio does not exceed 4.5 times. We expect EBITDA/Interest coverage to remain above 2 times and the company should continue to generate free cash flow, but the large amount of absolute debt suggests it might take longer than 12-18 months to bring leverage below 6 times. The B2 CFR assumes all free cash flow will be used to pay down debt.

The acquisition is transformative for Novolex because it increases its pro forma revenues to $3.6 billion and expands its geographic presence in Europe, though it remains a predominantly North American company. The acquisition broadens Novolex's product offering, adding rigid packaging used in food service and food processing to its legacy flexible plastic and paper packaging products. Waddington has higher margins than Novolex legacy business, due to some high margin products such as compostable containers and metalized plastic utensils. Waddington products are complementary to Novolex and are sold to a similar customer base, but there is no overlap in manufacturing footprint between the two firms and Waddington has longer raw material pass-throughs. The company projects modest amount of synergies, driven mainly by procurement savings and operational improvements. The Waddington Group's management will join Novolex and will continue to run the segment. Novolex's management has a successful track record in integrating large acquisitions, but it still faces typical integration risks related to acquiring a carve-out business.

The rating benefits from Novolex's scale in the fragmented flexible packaging industry and its diversified product portfolio. The company's product portfolio now includes some commodity-type of products with low margins, for example, plastic retail take out bags, but also some higher margin products, such as food-contact paper packaging. The company benefits from long-standing relationships with large customers, cost pass-through provisions in sales contracts, albeit with lags, and exposure to the more stable food packaging sector. The company is projected to have good liquidity.

The negative outlook reflects expectations that the company will integrate Waddington, continue to generate free cash flow and use it for debt repayment such that pro forma leverage tracks to 6.5x by mid 2019.

We could upgrade the rating if the company demonstrates debt pay-down and reduces leverage below 5.3 times on a sustained basis, improves interest coverage above 3.4 times and funds from operation to debt sustainably above 10%.

We could downgrade the rating if the company's operating performance deteriorates, leverage remains above 6.5x, free cash flow turns negative and the company pursues another sizeable debt-funded acquisition or dividend recapitalization that delays deleveraging by another year.

Novolex is expected to maintain good liquidity. It reported $65 million of cash on hand as of March 31, 2018 and is projected to have $20 million pro forma for the transaction. The company is upsizing its $300 million revolver by $200 million and will extend its maturity to December 2022. The revolver is expected to be undrawn pro forma for the acquisition. The revolver has a springing maximum 7.0x first lien net leverage ratio test that is triggered when more than 35% of the revolver is drawn. The company has significant headroom under the covenant and we do not expect it to be triggered. There are no financial maintenance covenants in the term loan. We expect the company to cover its main cash needs from internally generated cash flow. Peak working capital use is in the second and third calendar quarters due to the seasonal build of inventory. There are no near term maturities aside from manageable annual term loan amortization totaling 1% of the principal amount paid quarterly or approximately $29 million per year. Most assets are encumbered by the senior secured credit facilities, leaving few sources of alternative liquidity.

Headquartered in Hartsville, South Carolina, Flex Acquisition Company, Inc., which is doing business as Novolex, is a manufacturer of paper and plastic packaging products, ranging from bags for grocery, retail and food service markets to can liners, specialty films and lamination products and single use plastic cutlery and take away containers. Pro forma for the Waddington acquisition, Novolex will have 62 manufacturing plants worldwide. Novolex, has been a portfolio company of The Carlyle Group since December 2016. Novolex's pro forma revenues for the twelve months ended March 31, 2018 were approximately $3.6 billion.

The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass, and Plastic Containers published in May 2018. 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 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.

Anastasija Johnson
Vice President - Senior Analyst
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

Brian Oak
MD - Corporate Finance
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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