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Rating Action:

Moody's downgrades AgroFresh's CFR to Caa1 with stable outlook

26 Mar 2020

New York, March 26, 2020 -- Moody's Investors Service ("Moody's") downgraded AgroFresh, Inc.'s Corporate Family Rating (CFR) to Caa1 from B3 and Probability of Default rating to Caa1-PD from B3-PD. Moody's also downgraded the rating on the Senior Secured Bank Credit Facility of AgroFresh to Caa1 from B3. The Speculative Grade Liquidity Rating of AgroFresh is downgraded to SGL-4. The outlook is stable. The downgrade reflects increasing refinancing risk rather than a significant deterioration in performance. While 2019 revenue declined due to lower sales of its key SmartFresh products and weak pear harvest in Europe, earnings were geenrally flat and the company generated free cash flow. However, earnings growth continues to lag behind expectations and current market conditions can also make it difficult to for the company to refinance its capital structure with over a year left until its $406 million term loan matures and the revolver turning current on April 1. In addition, the company currently has no access to the revolver because it would not be able to meet covenant levels.

Downgrades:

..Issuer: AgroFresh, Inc.

.... Corporate Family Rating, Downgraded to Caa1 from B3

.... Probability of Default Rating, Downgraded to Caa1-PD from B3-PD

.... Speculative Grade Liquidity Rating, Downgraded to SGL-4 from SGL-3

....Senior Secured Revolving Credit Facility, Downgraded to Caa1(LGD3) from B3(LGD3)

....Senior Secured Term Loan B, Downgraded to Caa1(LGD3) from B3(LGD3)

Outlook Actions:

..Issuer: AgroFresh, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The Caa1 corporate family rating reflects increasing refinancing risk and high debt levels in addition to high business risk due to technology, product and crop concentration, small scale. Although the company is more diversified now than when it was initially rated in 2015 as it was spun off from Dow, it has failed to generate EBITDA growth and to delever. EBITDA has remained fairly flat as volume of its core product has declined offsetting ramp up of new products and expansion into other active ingredients or technologies. As a result, gross debt/EBITDA as adjusted by Moody's remains above 6 times and the company's capital structure is unsustainable unless it timely refinances its $406 million term loan due July 31, 2021.

While AgroFresh has introduced some new products and diversified its technology to new crops through the Tecnidex acquisition, it continues to generate over 75% of its sales from its principal post-harvest product SmartFresh, based on its patented 1-MCP technology applied to apples. The company is facing increasing competition and patent expiration for its encapsulation technology over the next few years, which together with acquisitions in other post-harvest products will likely pressure margins going forward. As a result, Moody's expects modest organic growth and EBITDA improvement, while inorganic growth opportunities are constrained by the company's levered balance sheet and recent declines in its stock value.

The credit profile benefits from the company's high EBITDA margins and asset-light business model, but high debt burden constrain cash generation. In 2019, the company terminated its tax receivables agreement with Dow, paying $16 million in settlement of all past and estimated future liabilities. The settlement eliminates future cash payments to Dow, increasing free cash flow going forward. In addition, in October 2019, the jury awarded AgroFresh $31.1 million in damages, including punitive damages, related to its lawsuit against a former consultant MirTech, Inc, a competitor Decco U.S. Post Harvest Inc. and Decco's parent UPL related to patent infringement. AgroFresh is seeking additional $14 million in damages. Decco and UPL filed post-trial motions asking the trial Court Judge to set aside the jury's award and find in favor of UPL and Decco. The court has not ruled on any of the post-trial motions to date. The receipt of the award would allow AgroFresh to reduce debt and would be a credit positive event, but the timing of the receipt is uncertain.

As a specialty chemical manufacturer, we view AgroFresh as having moderate environmental and social risks. Moody's believes the company has established expertise in complying with these risks, and has incorporated procedures to address them in their operational planning and business models. The company states it has completed over 400 international health and environmental tests that prove that its products, based on 1-MCP, are safe for consumers, workers and environment. The company has to register its products with local authorities before they can be used in that jurisdiction. Although 1-MCP is destroyed when exposed to air and leaves no residue, use of AgroFresh's current products is not compatible with "organic" labeling standards in all jurisdictions. There are some social risks, as an increase in consumer preferences for organic produce could negatively affect the demand for its products or services. Since the product extends shelf life for fresh produce, a shift in consumer preferences toward frozen or processed food products, or toward locally grown produce, could also impact demand. However, a shift toward frozen or processed food is less likely than a shift toward seasonal or locally grown produce. However, the company also claims that its products improve sustainability of agricultural products by extending shelf-life and reducing waste. AgroFresh is a public company, which reduces governance risks, but has a significant ownership concentration by Dow, which could exercise control over any transactions related to the change of ownership or M&A activity. As of December 2019, Dow held 41% of the company's stock and 3,000,000 of outstanding warrants.

The stable rating outlook reflects expectations of flat to modest EBITDA growth and improved free cash flow generation post TRA termination. Moody's could upgrade the rating if the company refinances its capital strucutre, extending maturities for a substantial time to eliminate near-term refinancing risk and improves its liquidity and access to a revolver.

Moody's could downgrade the rating if the company fails to extend its revolver and refinance debt maturities and if its operating performance deteriorates and cash flow turns negative.

AgroFresh's SGL-4 Speculative Grade Liquidity Rating reflects weak liquidity due to refinancing risk, as the company's revolver turns current on April 1 and its $406 million term loan is due on July 31, 2021. The company held approximately $29 million in cash at the end of December 2019 and is projected to generate free cash flow in 2020. The majority of cash at the end of the year was held in the US, but the share of domestic and overseas cash changes throughout the year depending on the season and some cash remains in jurisdictions that cannot be easily repatriated. The company has a $12.5 million revolver due April 1, 2021, but it could not access it because it would not meet the springing senior secured leverage covenant. The credit agreement has a springing senior secured net leverage ratio of 5.75 times if the revolver is drawn or outstanding letters of credit are above $5 million. The covenant level falls to 5.5x in December 2020. All assets are encumbered under secured credit facilities.

Headquartered in Philadelphia, PA, AgroFresh Solutions, Inc., the parent company of AgroFresh, Inc., was originally incorporated as Boulevard Acquisition Corp., a special purpose acquisition company, and changed its name after completing its acquisition of the AgroFresh business from Dow. AgroFresh is an agricultural chemicals company in the area of fresh produce preservation, which provides products and services for use in produce storage, transportation, and harvest management. Revenues for the last twelve months ending December 31, 2019 were approximately $170 million.

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.

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.

Anastasija Johnson
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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