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Rating Action:

Moody's assigns first-time B3 ratings to Polymer Additives, Inc. (Valtris)

14 Jun 2018

New York, June 14, 2018 -- Moody's Investors Service ("Moody's") has assigned a first-time B3 Corporate Family Rating (CFR) to Polymer Additives, Inc. (d/b/a Valtris Specialty Chemicals). At the same time, Moody's has assigned B3 ratings to the company's proposed senior secured first lien revolver and term loan, as well as a Caa2 rating to its second-lien term loan, all to be issued by Polymer Additives, Inc., and guaranteed by its direct holding company and each of its direct and indirect wholly-owned domestic subsidiaries. The ratings outlook is stable.

The proceeds from the term loans will be used to refinance Valtris' existing term loans and to fund the potential acquisition of business divisions from Ineos Group Holdings S.A. (Ba2 stable) for EUR111 million, which was announced in May 2018.

The ratings are subject to the transaction closing as proposed and receipt and review of the final documentation.

Assignments:

..Issuer: Polymer Additives, Inc.

....Corporate Family Rating, Assigned B3;

....Probability of Default Rating, Assigned B3-PD;

....Senior Secured First Lien Revolving Credit Facility, Assigned B3 (LGD3)

....Senior Secured First Lien Term Loan, Assigned B3 (LGD3)

....Senior Secured Second Lien Term Loan, Assigned Caa2 (LGD5)

Outlook Actions:

....Outlook, Assigned Stable.

RATINGS RATIONALE

Valtris' B3 CFR is constrained by its low EBITDA margin at about 10%, after consolidating Ineos' businesses, and high debt leverage of about 7.0x, based on Moody's estimates and including analytical adjustments. We expect transaction related fees and expenses will delay free cash flow generation to 2019 and, despite low maintenance capital expenditures, the overall pace of debt reduction will likely be moderate considering potential restructuring and reinvestment needs. The ownership by a private equity firm also constrains Valtris' credit profile given possible acquisitions, refinancing activities or shareholder remunerations.

"Valtris' rating also reflects its relatively small scale, exposure to commoditized products and regulatory risks that result in product substitutions," says Jiming Zou, a Moody's Vice President and Lead Analyst for Valtris. Despite leadership positions in niche applications such as bio-based plasticizers and environmentally friendly fast-fusing plasticizers, Valtris faces competition in a largely commoditized polymer additives market with sufficient capacity, supply and substitutes. Certain Valtris' products such as butyl benzyl phthalate plasticizers have seen declining sales due to the impact of government regulation and product substitution in the last few years.

However, Valtris has a broad range of polymer additives, including plasticizers, stabilizers and lubricants, which support its sales visibility and help reduce business volatility resulting from product cycles and government regulations on phthalate plasticizers. Its business profile is also backed by broad customer base, geographic diversification, entrenched customer relations with 80% direct sales and a variety of raw materials including toluene, soybean oil and tallow. We expect demand for Valtris' polymer additives to grow in line with GDP, given their primary application in PVC, as well as other polyolefin and rubber products, which in turn are driven by applications in building, transport, packaging, electric and healthcare.

The acquisition of INEOS' businesses, including polymer additives and chlorotoluenes and derivatives, will double the company's revenues base to over $700 million, expand its European manufacturing base, supplement its product offerings with environmentally friendly esters plasticizers and offer growth opportunities in benzyl alcohol and derivatives. The combined businesses will also have a larger exposure to more resilient end markets such as healthcare, paints and coatings, personal care, automotive fuels, and agriculture, besides Valtris' existing customers in the building, transportation and industrial sectors.

The acquisition of INEOS' businesses also presents certain execution risks to Valtris. As the profit margin of Ineos' businesses has been lower in the last few years, the acquisition will dilute Valtris' EBITDA margin. The combination of Ineos' mostly EU-based production facilities with Valtris' largely US-based operations raises uncertainty with regard to the timing and extent of the expected synergies. In addition, one of the acquired Ineos' businesses, which manufactures biodiesel for automotive uses and edible oils for consumer markets, is a low-margin commodity business and management is evaluating strategic alternatives for this business.

Valtris' liquidity is adequate, supported by an expected cash balance of more than $10 million and the availability under the newly proposed $60 million first lien revolver. The new $60 million revolver with a maturity in 2023 will remain undrawn at the closing of the transaction and is expected to be available throughout the next 12 months, based on the springing first-lien net leverage covenant set with a 35% cushion to the sponsor model and that it will only be tested once it's 35% drawn. The first lien term loan will amortize at 1% of principal, or $3 million per annum. Dividends are not expected in the near term, but may occur over time.

Valtris' B3-rated first lien revolver and first lien term loan benefit from the security of substantially all assets of the company and guarantors on a first priority basis. The $105 million second lien term loan, rated Caa2, reflects its effective subordination to first lien debt in the capital structure. Apart from the springing first lien net leverage covenant on the revolver, there are no financial covenants for the term loans.

The stable outlook reflects that Valtris will improve its business profile and generate business synergies after consolidating Ineos' businesses and increase the sales of environmentally friendly plasticizers to counterbalance the decline in phthalate plasticizers.

Moody's would consider upgrading the ratings if the company achieved leverage sustainably below 6.0x, and realized Retained Cash Flow/Debt sustainably above 10%. Conversely, the ratings or outlook could be lowered if earnings or liquidity were to deteriorate, resulting in negative free cash flow, lower margins, or leverage sustained above 7.5x.

The principal methodology used in these ratings was Chemical Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Polymer Additives, Inc., d/b/a Valtris Specialty Chemicals, is a manufacturer of a diverse set of polymer modifiers, lubricants, and stabilizers primarily used as additives in the production of plastics. On May 13, 2018, Valtris entered into an agreement to acquire certain businesses from INEOS Group Holdings S.A. (Ba2 stable). The pro-forma combined business generated $738 million of revenue in 2017.

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.

Jiming Zou
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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