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Rating Action:

Moody's assigns first-time B2 CFR to CRH Europe Distribution; stable outlook

15 Oct 2019

Frankfurt am Main, October 15, 2019 -- Moody's Investors Service ("Moody's") has today assigned a B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) to Clay HoldCo B.V., a holding company of the Netherlands-based distributor of building materials CRH Europe Distribution ("CRH ED" or "company"). Moody's has also assigned B1 instrument ratings to the proposed EUR 965 million 1st lien senior secured term loan B (TLB) and EUR 180 million 1st lien senior secured revolving credit facility (RCF). Additionally, Moody's has assigned a Caa1 rating to the proposed EUR 248 million 2nd lien senior secured TL, also to be issued by Clay HoldCo B.V. The outlook on all aforementioned ratings is stable.

Proceeds from the new TLs will be used to finance the acquisition of CRH ED from CRH Group by Blackstone Group. Moody's expects that the indirect cash contribution from the new shareholder will be mainly in the form of preferred equity that depending on the final documentation will likely be eligible for 100% equity treatment.

RATINGS RATIONALE

"The B2 CFR reflects a high starting leverage following the company's buyout by Blackstone and the expectation of a deleveraging over the next quarters supported by continuous positive free cash flow generation", says Vitali Morgovski, a Moody's Assistant Vice President-Analyst and the lead analyst for CRH ED. "The leverage mitigates the strength of the company's diversified business profile with strong regional market positioning", Mr. Morgovski continues.

The B2 CFR rating of CRH ED reflects its (1) leading position in the building materials distribution market in Europe; (2) diversification across six core European markets; (3) relative resilience of the business model due to high proportion of more stable renovation and maintenance (RMI) end-market sales; (4) low capital intensity of the business allowing positive free cash flow generation even in the downturn; (5) significant portfolio of owned real estate assets.

The rating is however constrained by (1) the company's significant financial leverage (Moody's adjusted gross debt/ EBITDA) of around 6.5x; (2) highly competitive market landscape resulting in a relatively low profitability; (3) high business seasonality requiring some RCF drawdown during the year; (4) exposure to the cyclicality of construction markets; (5) event risk related to potential increase in shareholding in French distributor SAMSE as well as further efforts to consolidate the market for building materials distribution.

CRH ED is in the process of being acquired by the private equity firm Blackstone. As a result, we expect CRH ED's financial policy to favour shareholders over creditors as evidence by CDH ED's high leverage. However, the company is not foreseeing any dividend distribution in the near term. Moody's expects that acquisitions will be supported by adequate equity contributions.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects Moody's expectation of a gradual deleveraging in the coming 12-18 months resulting from EBITDA improvement paired with contractually enforced deployment of excess cash to debt repayment. Furthermore, the stable outlook is conditional upon CRH ED's gradual strengthening of its liquidity profile, driven by positive free cash flow generation.

WHAT COULD MOVE THE RATINGS - UP

Positive rating pressure could arise if:

• Moody's adjusted gross debt/EBITDA declines sustainably below 5.5x;

• Operational improvements evident in growing Moody's adjusted operating margin

• Strengthening liquidity profile supported by positive free cash flow generation

WHAT COULD MOVE THE RATINGS -- DOWN

Conversely, negative rating pressure could arise if:

• Moody's adjusted gross debt/EBITDA increases above 6.5x;

• Moody's adjusted operating margin deteriorates;

• Moody's adjusted EBITA/ Interest below 1x;

• Negative free cash flow resulting in deteriorating liquidity

STRUCTURAL CONSIDERATION

In the loss-given-default (LGD) assessment for CRH ED, based on the structure post refinancing, Moody's ranks pari passu the proposed new senior secured EUR 965 million TLB and EUR 180 million RCF, which share the same security and are guaranteed by certain subsidiaries of the group accounting for at least 80% of consolidated EBITDA. The term loan is covenant-light with a spring net leverage covenant set at 8.25x only applicable to the revolver if it is drawn over 40%. The B1 ratings on these instruments reflect their priority position in the group's capital structure and the benefit of loss absorption provided by the junior ranking debt.

The EUR 248 million of senior secured second lien loans are ranked junior to 1st lien TLB and RCF, they share the same security with 1st lien TLB and RCF and are also guaranteed by subsidiaries of the group accounting for at least 80% of consolidated EBITDA. This is reflected in the Caa1 rating assigned to these loans.

LIQUIDITY

The liquidity profile of the company following the proposed financing is adequate. This is reflected in EUR 25 million - EUR 30 million of cash at the deal closure that given the positive working capital seasonality in the fourth quarter will grow to EUR 80 -- EUR 85 million at the year-end 2019. The EUR 180 million revolving credit facility (RCF) is expected to be fully undrawn at the year-end 2019. Due to the large working capital (WC) seasonality, which is characterized by a gradual build-up of WC during the year, reaching its peak level in October-November and a release in December, Moody's expects some drawdown on RCF during the year. However, despite higher capex Moody's expects a positive free cash flow generation for the next years, which would allow a full repayment of RCF by the year-end. The ongoing positive free cash flow generation should allow a gradual improvement of the company's liquidity profile.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

PROFILE

Based in Amsterdam, the Netherlands, CRH Europe Distribution (CRH ED) is the third-largest European building materials distributor operating in Germany, the Netherlands, Belgium, France, Switzerland and Austria. In July 2019 the company was acquired by Blackstone from CRH Group, one of the world's largest building materials companies, for a total consideration of EUR 1.7 billion as CRH decided to focus on its heavy side building materials business. In 2018, CRH ED generated EUR 3.7 billion in revenues and EUR 177 million of management-adjusted EBITDA.

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.

Vitali Morgovski, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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