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Rating Action:

Moody's assigns new B2 CFR to Techem; stable outlook

28 Jun 2018

Frankfurt am Main, June 28, 2018 -- Moody's Investors Service ("Moody's") has today assigned a B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) to Blitz F18-674 GmbH, which will become the holding company of German sub-metering and energy management services provider Techem Energy Metering Service GmbH & Co. KG ("Techem" or "group"). Moody's has also assigned B1 instrument ratings to the proposed EUR2,340 million senior secured term loan B (TLB) and EUR275 million senior secured revolving credit facility (RCF), to be raised by Blitz F18-675 GmbH, a direct subsidiary of Blitz F18-674 GmbH and intermediate holding of Techem. Additionally, Moody's has assigned a Caa1 instrument rating to the EUR465 million senior secured second lien notes to be issued by Blitz F18-674 GmbH. The outlook on all aforementioned ratings is stable.

Proceeds from the new TLB and notes will be used to finance the acquisition of Techem by a consortium led by private investment manager Partners Group via Blitz F18-675 GmbH, to refinance Techem's existing debt and pay transaction fees and expenses. Moody's anticipates that the indirect cash contribution from the new shareholders will be in the form of equity instruments.

Concurrently, Moody's has withdrawn the Ba3 CFR and Ba3-PD PDR assigned to Techem Energy Metering Service GmbH & Co. KG. At the time of withdrawal the outlook was stable. Please refer to the Moody's Investors Service's Policy for Withdrawal of Credit Ratings, available on its website, www.moodys.com.

The existing Ba3 instrument ratings on the EUR1,600 million senior secured TLB and EUR150 million senior secured RCF raised by Techem GmbH remain unchanged. Moody's expects the outstanding loans to be repaid upon closing of the acquisition and to withdraw these instrument ratings upon repayment.

RATINGS RATIONALE

"The B2 CFR reflects the increase in Techem's indebtedness following the proposed acquisition and refinancing, which results in an expected leverage of 7.7x Moody's adjusted debt/EBITDA in fiscal year 2018 on a pro forma basis", says Matthias Heck, a Moody's Vice President -- Senior Credit Officer and Lead Analyst for Techem. "This positions Techem initially weakly in the B2 rating category, but we anticipate that leverage will reduce towards 7.0x over the next 12-18 months, driven by expected EBITDA growth and debt reduction due to free cash flow generation", adds Mr. Heck.

Techem continued to grow operating profits and margins in FY2018 (ended 31 March). Revenues decreased to EUR766 million (reflecting the impact of the first time application of IFRS 15) from EUR783 million in FY2017. The company-adjusted EBITDA increased to EUR379 million (reflecting the impacts of IFRS 15 and 16) from EUR320 million, implying an EBITDA margin of 49%, compared to 41% in FY2017. Besides the impact from the accounting changes, the strong increase in the EBITDA margin was driven by Techem's operations excellence program, resulting in improved service quality and optimized processes.

The improved profitability will support Techem's EBITDA growth and deleveraging over the next two years, when Moody's forecasts revenues to grow in the low- to mid-single-digit percentage range. Steady growth in domestic Energy Services will be supported by increasing smoke detector volumes, the introduction of new product offerings as well as a new peak in legionella analyses expected in FY2020. Energy Services International revenues will continue to evolve with continued sub-metering penetration.

Techem's deleveraging will be further supported by voluntary debt repayments. Moody's forecasts free cash flow (FCF) of EUR50-100 million per annum over the next two years, which Techem plans to use entirely to reduce debt. Under the previous shareholder, Techem's FCF was negative in the past three years, mainly due to high dividend payments. The expectation of positive FCF generation results from the financial strategy of the new shareholders, which does not envisage any dividend distributions.

STRUCTURAL CONSIDERATIONS

In the loss-given-default (LGD) assessment for Techem, based on the structure post refinancing, Moody's ranks pari passu the proposed new senior secured EUR2,340 million TLB and EUR275 million RCF (both maturing 2025), which share the same security and are guaranteed by certain subsidiaries of the group accounting for at least 80% of consolidated EBITDA. The B1 (LGD3) ratings on the senior secured instruments reflect their priority position in the group's capital structure and the benefit of loss absorption provided by the junior ranking debt.

The EUR465 million of senior secured second lien notes (due 2026) are secured by certain holding company collateral on a first-ranking basis, and share the same guarantors and part of the same collateral as the senior secured credit facilities on a subordinated basis. This is reflected in the Caa1 (LGD6) rating assigned to the notes. Moody's has considered trade payables as ranking at the level of the senior secured credit facilities and pension obligations and minimum lease rejection claims at operating subsidiaries at the level of the senior secured second lien notes.

The group's capital structure further includes shareholder loans, which qualify for 100% equity treatment by Moody's and is therefore not included in the LGD assessment and debt calculations for the group.

LIQUIDITY

Techem's short-term liquidity is good. The group's internal cash sources comprise around EUR40 million of cash on balance sheet as of March 2018 pro forma of the proposed transaction, as well as cash flows from operations of around EUR230 million per annum. Together with EUR275 million available commitments under the group's proposed RCF these funds will cover all expected cash needs in the next 12-18 months. Cash uses mainly include Moody's-adjusted capital expenditures, including the repayment of lease liabilities, of around EUR150 million per annum and an assumed minimum cash level to run day to day operations that Moody's has estimated as being 3% of revenues.

The liquidity assessment also considers that there will be one springing covenant (senior secured net leverage ratio) attached to the new RCF, which is tested if the RCF is drawn by more than 40% and which Moody's expects to be set with ample headroom.

OUTLOOK

The stable outlook reflects the expectation that Techem will continue to grow its revenues and profits in a stable supportive regulatory environment in Germany and Europe, whilst at least maintaining its current profitability. Moreover, Moody's expects the group to adhere to a thoughtful and prudent financial policy, as shown by free cash flows used for debt repayments and a sustained sound liquidity profile. As a result, Moody's-adjusted debt/EBITDA is forecast to reduce towards 7.0x over the next 12-18 months.

WHAT COULD CHANGE THE RATING UP/DOWN

An upgrade of Techem's ratings would require (1) leverage to decline sustainably below 6.5x Moody's-adjusted debt/EBITDA, (2) retained cash flow/net debt (Moody's-adjusted) to increase above 10%, and (3) a track record of a prudent financial policy, evidenced by available cash flow being applied to debt reduction.

Downward pressure on Techem's ratings would build if (1) leverage was not reduced below 7.5x Moody's-adjusted debt/EBITDA by the end of FY2019, (2) retained cash flow/net debt (Moody's-adjusted) declined to mid-single digits and (3) free cash flow (Moody's-adjusted) turned negative.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

CORPORATE PROFILE

Headquartered in Eschborn, Germany, Techem is a leading provider of energy services operating through two divisions: Energy Services (accounting for 89% of group sales in FY2018) and Energy Contracting (11%). Energy Services provides sub-metering of heat and water consumption for multi-dwelling housing units, energy cost allocation and billing services. The segment also offers supplementary services such as smoke detector installation and maintenance and legionella analysis in drinking water. Energy Contracting offers a holistic management of clients' energy consumption through the planning, financing, construction and operation of heat stations, boilers, cooling equipment and combined heating and power units. In FY2018, Techem generated total revenues of around EUR766 million of which 75% were generated in Germany. Techem's current owner Macquarie agreed to sell the company to a consortium led by private investment manager Partners Group for an enterprise value of EUR4.6 billion. The transaction is expected to close in the third quarter of 2018.

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.

Matthias Heck
VP - Senior Credit Officer
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

Matthias Hellstern
MD - Corporate Finance
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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