Hong Kong, November 27, 2017 -- Moody's Investors Service has assigned a first-time B1 corporate
family rating (CFR) to Pearl Holding lll Limited (Pearl lll).
At the same time, Moody's has assigned a B1 rating to the
proposed $175 million senior secured notes to be issued by Pearl
III.
The rating outlook is stable.
Pearl lll plans to use the proceeds from the senior secured notes to repay
the existing M&A loan facility of $175 million initially borrowed
by FT Holding ll Limited — which was merged with Pearl lll —
to acquire a 100% stake in Fischer Tech Ltd. and to repay
existing indebtedness at Pearl lll.
The ratings are dependent upon receipt of satisfactory documentation and
the successful completion of Pearl III's refinancing.
RATINGS RATIONALE
"Pearl lll's CFR primarily reflects its small scale, the fragmented
and competitive nature of the tooling and molding markets, customer
and business concentration, as well as the company's moderate
financial leverage, following its debt-funded acquisition
of Fischer Tech," says Wan Hee Yoo, a Moody's Vice President
and Senior Credit Officer.
"At the same time, Pearl lll's CFR also factors in the company's
steady and good profitability, supported by its operating efficiency,
diversified end-markets and long-standing customer relationships,
and adequate liquidity that will improve further upon completion of the
refinancing," adds Yoo.
Although Pearl III's revenue — which will likely reach $250
million over the next 1-2 years — is larger than that of
many plastic molding components manufacturers in Asia, the company's
revenue base is still meaningfully smaller than that of most of its similarly
rated but more broadly focused manufacturing peers in the same region.
Given this factor and its heavy reliance on the automobile and IT segments
for revenue generation, Pearl lll's operations are vulnerable to
potential industry downcycles or external market disruptions. The
company is also exposed to intense competition, due to the fragmentation
in the market and low entry barriers.
These risk factors are partly mitigated by the company's good operational
stability, supported by its: (1) long-standing relationship
with key customers; (2) improved end-market diversity following
its acquisition of Fischer Tech; and (3) track record of offering
reliable supply and on-time delivery to global players.
Moody's expects that Pearl lll's adjusted EBITA margin will
improve to about 12.8%-12.9% over the
next 1-2 years from about 12.7% for the 12 months
ended 31 March 2017 (pro forma figures including Fischer Tech),
mainly owing to the company's cost-cutting measures,
as well as potential synergies from the Fischer Tech acquisition.
That said, there remains a certain degree of execution and integration
risks from the acquisition.
Pearl III's capital spending will likely remain relatively high
over the next 1-2 years, owing to potential investments to
create operational synergies with Fischer Tech. Nevertheless,
Moody's expects that the company will generate modest free cash
flow, given its good level of profitability and manageable level
of capital spending relative to its operating cash flow.
Moody's expects that the debt-funded acquisition of Fischer
Tech for $124 million in November 2017 will increase Pearl III's
adjusted gross debt/EBITDA to about 4.3x in 2017 (pro forma figures
including the full-year earnings contribution from Fischer Tech)
from about 3.1x in 2016. However, this ratio will
likely fall slightly to about 4.0x-4.2x in 2018-19,
owing to modest earnings growth. This level of financial leverage
is consistent with its current rating category.
The company's liquidity should be adequate over the next 12 months,
because its operating cash flow, cash balance and unused revolver
of $25 million are sufficient to cover capital spending.
Upon successful completion of its refinancing, Pearl III will have
no material debt maturities until 2022.
The rating on the proposed senior secured notes will not be affected by
subordination to claims at the operating subsidiaries, because:
(1) the majority of claims will reside at Pearl III post-refinancing;
and (2) the notes will be secured by a first-lien on effectively
all of the assets, as well as guarantees from Pearl lll's
substantial subsidiaries, excluding those located in China and Malaysia.
At the same time, the rating on the notes will not be higher than
the CFR, because this debt will constitute effectively Pearl III's
only outstanding debt which implies limited junior cushions in its liability
structure.
The stable rating outlook reflects Moody's expectation that Pearl lll's
credit quality will remain consistent with its current rating category
over the next 1-2 years.
Upward pressure on the rating could arise over time if the company:
(1) improves its business profile through meaningful revenue growth and
further customer diversification; (2) demonstrates adjusted gross
debt/EBITDA below 3.0x on a sustained basis; and (3) maintains
a good liquidity profile.
Downward pressure on the rating could emerge if Pearl lll's revenue
and earnings weaken, such that its adjusted gross debt/EBITDA exceeds
4.5x-5.0x on a sustained basis, or the company's
liquidity profile weakens significantly. The rating could also
be pressured in the event of significant revenue contraction from its
key customers.
The principal methodology used in these ratings was Global Manufacturing
Companies published in June 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Pearl Holding lll Limited (Pearl lll) is a precision engineered plastic
components producer, mainly engaged in the manufacture and sale
of plastic injection molds and related products. In November 2017,
the company acquired Singapore-based Fischer Tech Ltd.,
a former Singapore Exchange-listed manufacturer of precision engineering
plastic components. Pearl lll is an indirectly wholly owned subsidiary
of Platinum Equity, LLC, a private equity firm, headquartered
in Los Angeles.
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.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Wan Hee Yoo
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
