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Rating Action:

Moody's downgrades Avantor's CFR to B2; Assigns B1 and Caa1 ratings to new 1st and 2nd lien term loans

01 Jun 2016

Approximately $835 million in new loans affected.

New York, June 01, 2016 -- Moody's Investors Service downgraded the Corporate Family Rating (CFR) to B2 from B1 and the probability of default rating (PDR) to B2-PD from B1-PD of Avantor Performance Materials Holdings S.A. (Avantor) and assigned B1 to the new first lien senior secured term loan and Caa1 to the new second lien senior secured term loan issued by Avantor's subsidiary Avantor Performance Materials Holdings, Inc. The proceeds of the new term loans will be used to refinance the existing senior secured term loan facility, the B1 rating on which will be withdrawn when the new TL closes, and to finance a $759 million dividend to the equity owner New Mountain Capital. The outlook on the ratings is positive.

"The dividend recapitalization is being done at a time when the company's balance sheet is under-levered following a period of debt reduction and significant growth in EBITDA, which is largely a result of improved execution by new senior management," according to Joseph Princiotta, VP- Senior Credit Officer at Moody's and lead analyst responsible for Avantor's ratings.

Ratings Downgraded:

Avantor Performance Materials Holdings S.A.

Corporate Family Rating to B2 from B1

Probability of Default to B2-PD from B1-PD

Ratings Outlook Positive

Ratings Assigned:

Avantor Performance Materials Holdings, Inc.

$670 mm Sr. Sec. TL due 2023 -- B1 LGD3

$50mm Sr. Sec. Revolver due 2021 -- B1 LGD3

$165 2nd Lien TL due 2024 -- Caa1 LGD5

Ratings Outlook Positive

Ratings to be withdrawn at Closing:

Avantor Performance Materials Holdings, Inc.

$35mm Revolver due 2017 -- B1 LGD3

$185mm Sr Sec TLB due 2017 -- B1 LGD3

RATINGS RATIONALE

The B2 rating reflects the stability and stickiness of the company's branded and specialty revenue base, long-lived customer relationships and a strong reputation with customers, strong P&L performance in recent quarters, a relatively new and impressive management team, and the establishment and stability of positive free cash flow generation. The ratings also reflect the recent repositioning of the manufacturing footprint, along with other cost and pricing actions that have resulted in a significant increase in EBITDA margins since the new management team took the helm in mid-2014.

Avantor's competitive strengths also include FDA registered, ISO certified, cGMP manufacturing sites in North America, Europe and India that provide best-in-class global supply chain quality and security management systems to large pharma customers. Avantor's products are often specified into customer's processes at various stages of drug product life cycles contributing to a certain 'stickiness' due to costs and risks of changing suppliers after regulatory approvals.

The ratings are currently constrained due to the high leverage that will result from the pending leveraged dividend recapitalization. Other negative factors include the company's small scale, limited segment diversification, and significant customer concentration with large pharma companies and distributors. However, this risk is mitigated by long term relationships and ongoing (and renewed) attention to customer service excellence.

The most significant negative factor in the credit profile in the near term is the step up in debt and leverage resulting from the dividend recap, whereby debt is expected to increase from $80 million to $835 million, pro forma for the TL refinancing, and increasing gross pro forma leverage to roughly 5.3x (including Moody's adjustments) from its currently under-levered position of less than 1.0 times. Adjusted debt includes standard adjustments for unfunded pensions of $11 million and capitalized rents of $18 million, The initial debt-to-EBITDA leverage is high for the B2 CFR. However, modest capital expenditures and absence of a regular dividend result in cash flow metrics that are better aligned with the ratings category (compared to debt-to-EBITDA) with retained-cash-flow to total debt approaching 10% and free-cash-flow to total debt in the mid-to high-single digits percentage range. Moreover, Moody's expects these metrics to trend positively, reflecting debt reduction with free cash flow and the aforementioned favorable operational factors. Metrics give pro forma annualized credit to certain actions by management, mainly the optimization of the U.S. and European manufacturing footprint and certain cost reduction and pricing actions recently implemented, Moody's added.

The ratings anticipate management will pursue bolt-on acquisitions to build on or add to core strengths, but that acquisitions will be not be large in scale and not materially add to debt or stress the balance sheet.

Following a period of operational and cash flow challenges, mainly attributed to difficulties with a troubled SAP ERP implementation a few years ago, a new senior management team has refocused efforts on execution, including a renewed focus on customer service, R&D, procurement, and implementation of price increases in select customer accounts and markets, and is nearing completion on a comprehensive plan to streamline and optimize manufacturing and R&D. These actions are already evident in better margins and the operational changes are expected to further improve margins and cash flow going forward.

We consider Avantor's liquidity position to be good as the company had a cash balance of $40.3 million as of FYE December 2015 and is expected to generate positive free cash flow going forward for debt reduction. Strong free cash flow and an anticipated $50 million proposed revolving credit facility should cover the company's ongoing basic cash needs, working capital needs, the step up in capital expenditures, and still allow for further debt reduction.

The positive outlook reflects Moody's expectation that metrics trend favorably as robust free cash flow is applied to debt reduction and as operations benefit from organic growth and the likelihood that ongoing actions by management further improve operations. Moody's expects leverage, in the absence of bolt-on acquisitions, to decline to towards 4.0x in 18-24 months.

We could raise the rating if adjusted leverage improves to roughly 4.0x, or if retained cash flow to debt were to exceed 15% and free cash flow to debt 10%, both on a sustained basis. However, the CFR rating would likely be constrained to B1 due to the private equity ownership and the risk that future policies might shift and allow for a more leveraged balance sheet and large dividends.

Moody's would change the outlook to stable if debt is not reduced over the next few quarters and metrics fail to trend favorably, which could occur if the company were to make early acquisitions or if the current favorable trends in operations were to reverse. Continuation of high leverage, or if free cash flow were to deteriorate to neutral or near neutral, we would consider a downgrade to the ratings.

Incorporated in Luxembourg, Avantor's operational headquarters are located in Pennsylvania, USA. For the financial year-end (FYE) December 2015, Avantor's Moody's-adjusted revenues and EBITDA were approximately $456 million and $92 million, respectively and on an unaudited basis. The company has approximately 1,200 employees producing over 12,000 products across four broad product categories (pharmaceutical, laboratory, microelectronic and diagnostic products). Approximately 54% of Avantor's revenues are generated from the US and Canada; 16% from Europe; 13% from India; 8% from Asia; and 3% from Latin America.

Avantor manufactures and markets high-purity fine chemicals and advanced materials for a range of applications and products are marketed under various registered or trademarked brand names such as J. T. Baker, Macron Fine Chemicals, Rankem, BeneSphera, and POCH. Avantor was formed in 2010 when funds managed or advised by private equity firm New Mountain Capital LLC (unrated) acquired Mallinckrodt Baker from Covidien International Finance S.A. (A3 negative). In 2011, Avantor completed the strategic acquisitions of India-based RFCL Limited and Poland-based POCH S.A.

The principal methodology used in these ratings was Global Chemical Industry Rating Methodology published in December 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

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.

Joseph Princiotta
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's downgrades Avantor's CFR to B2; Assigns B1 and Caa1 ratings to new 1st and 2nd lien term loans
No Related Data.
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