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Rating Action:

Moody's changed Ingevity's outlook to stable from negative and affirmed its Ba2 CFR

11 Mar 2020

New York, March 11, 2020 -- Moody's Investors Service ("Moody's") has changed Ingevity Corporation's ("Ingevity") outlook to stable from negative. At the same time, Moody's has affirmed Ingevity's Ba2 Corporate Family Rating ("CFR"), Ba3 rating on the existing $300 million senior unsecured notes and Probability of Default Rating of Ba2-PD. Speculative Grade Liquidity Rating remains SGL-2.

Outlook Actions:

..Issuer: Ingevity Corporation

....Outlook, Changed To Stable From Negative

Affirmations:

..Issuer: Ingevity Corporation

.... Probability of Default Rating, Affirmed Ba2-PD

.... Corporate Family Rating, Affirmed Ba2

....Senior Unsecured Regular Bond/Debenture, Affirmed Ba3 (LGD5)

RATINGS RATIONALE

"The stabilization of Ingevity's outlook reflects its improved leverage of 3.1x at the end of fiscal year 2019 from a pro-forma level of 3.7x post the acquisition of Perstorp's caprolactone business in early 2019. Ingevity is now comfortably positioned within the Ba2 rating category. We expect the company to maintain adequate financial buffer against this challenging and volatile market environment and exercise caution when buying back shares or pursuing acquisitions," says Jiming Zou, a Moody's Vice President and Lead Analyst for Ingevity.

We expect the sluggish macroeconomy, weak demand in Europe and Asia and the potential impact from the coronavirus outbreak will limit its earnings growth in 2020. Particularly, weak demand from oilfield and industrial applications and price declines will continue to negatively affect its pine chemical business. The slowdown in automotive sales will deter the earnings growth in its activated carbon business, which experienced very strong growth over the last several years thanks to regulations to reduce gasoline vapor emission globally. Strengths in its activated carbon business more than offset the weakness in its pine chemicals and the acquired caprolactone business, raising the overall EBITDA to a record level of nearly $400 million and free cash flow of $161 million in 2019.

Despite a more cautious outlook for 2020, we still expect the company to generate about $100 million free cash flow that can potentially be used to pay down debt or for the share repurchase that was recently authorized up to $500 million. Ingevity announced in March 2020 that it intends to repurchase its shares up to $250 million over the next 12 to 18 months.

As management continues to look for growth opportunities, we expect event risks will remain elevated and deleveraging could be delayed in the absence of equity issuance given typically high price multiples. The acquisitions of Perstorp's caprolactone business in 2019 and Georgia-Pacific's pine chemicals business in 2018 reflected the company's strategy to broaden its business portfolio and diversify its earnings. We expect management to exercise prudence when pursuing acquisitions. The company has a target net leverage of 2.0x to 2.5x, versus its reported net leverage of 2.8x at the end of fiscal year 2019.

Ingevity's Ba2 CFR continues to reflect the company's market leadership in activated carbon for gasoline vapor control and pine chemicals, its strong profitability and ample free cash flow generation, but also takes into account its relatively small business scale, reliance on key raw material suppliers and debt-funded growth strategy after its spin-off from Westock RKT Company (WestRock Company, Baa2, stable) in 2016. In addition, the patent of its activated carbon "honeycomb" will expire in 2022, presenting a challenge to the company over time.

We expect Ingevity to maintain good liquidity given the expected free cash flow, $616.6 million availability under its revolving credit facility and $56.5 million cash balance as of December 31, 2019. The company will use its cash on hand and revolver to fund the acquisition, before issuing long-term debt. Ingevity does not have material debt maturities until a portion of its term loan due in 2022. The revolving credit facility and term loans have two financial covenants, a maximum total leverage ratio covenant of 4.0x (up to 4.5x allowed within four quarters after permitted acquisition), and a minimum interest coverage covenant of 3.0x. We expect the company to maintain good availability under its revolver as well as remain in compliance under its covenants. The majority of assets are encumbered by the secured credit facilities.

Ingevity's rating also factor in the environmental, social and governance considerations. Being a listed company, Ingevity is transparent in its financial reporting as well as its financial policy. Ingevity's activated carbon and pine chemical products involve the use of chemical materials, subjecting the company to environmental regulations. The production of pine chemicals using coproducts from natural kraft pulps which are renewable and environmentally friendlier than petrochemical alternatives. In addition, the strengthening environmental regulations on vehicle vapor emission control continue to stimulate the demand on Ingevity's activated carbon products.

We could upgrade the rating following a longer track record as a stand-alone entity that would demonstrate the company's commitment to the conservative financial policy. The company would need to increase its business scale and diversification, maintain its strong credit metrics, with debt/EBITDA below 3 times and RCF/Debt over 20%, for an upgrade.

The rating could be downgraded if the company's performance deteriorated or it undertook a large debt-funded acquisition or shareholder-friendly actions. Specifically, the rating could be downgraded if EBITDA margin falls sustainably below 20%; or its debt/EBITDA ratio rises above 3.5x and RCF/Debt declines to mid-teens. In addition, the Ba3 rating on the senior unsecured notes could come under downgrade pressure, if the performance of the company is weaker than expected and it continues to finance the business with secured debt.

The principal methodology used in these ratings was Chemical Industry published in March 2019. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in North Charleston, SC, Ingevity Corporation is a global manufacturer of pine-based chemicals (Performance Chemicals segment) used in pavement technologies, oilfield technologies and industrial specialties such as inks and adhesives, and high performance carbon materials (Performance Materials segment) used in gasoline vapor emission control systems in fuel tanks, as well as applications for water, food, beverage and chemical purification. The company was spun off by WestRock Company in 2016. In 2019, the company generated $1.3 billion in revenues. Ingevity acquired the Capa caprolactone business from Perstorp Holding AB for EUR590 million in February 2019.

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.

Jiming Zou, CFA
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

Glenn B. Eckert
Associate Managing Director
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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