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Rating Action:

Moody's downgrades Flex Acquisition Company CFR to B3, stable outlook

15 May 2019

New York, May 15, 2019 -- Moody's Investors Service ("Moody's") downgraded the corporate family rating of Flex Acquisition Company, Inc. (doing business as Novolex) to B3 from B2 and the probability of default rating to B3-PD from B2-PD. Moody's also downgraded instrument ratings as detailed in the list below. The outlook is stable.

"Underperformance of the acquired Waddington business and legacy operations resulted in higher than expected leverage and will delay anticipated deleveraging by at least a year," said Anastasija Johnson, senior analyst at Moody's.

Downgrades:

..Issuer: Flex Acquisition Company, Inc.

.... Corporate Family Rating, Downgraded to B3 from B2

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

....Senior Secured Revolving Credit Facility, Downgraded to B2 (LGD3) from B1 (LGD3)

....Senior Secured Term Loan, Downgraded to B2 (LGD3) from B1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)

Outlook Actions:

..Issuer: Flex Acquisition Company, Inc.

....Outlook, Changed To Stable From Negative

RATINGS RATIONALE

The B3 corporate family rating reflects high leverage metrics (7.4 times Debt/EBITDA at the end of 2018, excluding synergies and as adjusted by Moody's) and underperformance in the acquired and legacy businesses, which will result in longer than expected deleveraging trajectory. A loss of a major customer, slower than expected sales of new products and delays in passing through raw material price increases negatively impacted earnings of the Waddington business in 2018. As a result, the company recorded a $449.9 million goodwill impairment at the end of 2018, six months after acquiring the Waddington business for $2.275 billion in June 2018. In addition, operational difficulties also negatively impacted EBITDA of the legacy business. The company is focusing on improving performance of the acquired and legacy businesses and we expect modest EBITDA growth in 2019, however deleveraging will be delayed compared to our original expectations by approximately a year. We now expect the company to reduce leverage to just under 7 times in 2019 and to 6.5 times in 2020. We expect interest coverage to remain above 2 times and we also expect the company to continue to generate free cash flow, which can be used to accelerate deleveraging. However, the company has been acquisitive in the past and the current rating also reflects continued acquisition risk. The company also faces continued regulatory risk related to the company's legacy plastic retail bag business (14% of sales). The latter is somewhat offset by the company's rapidly growing line of environmentally friendly food packaging products.

The rating benefits from the company's scale and its diversified portfolio, however, individual end markets where it participates remain competitive and could be subject to some pricing pressure. The company benefits from a diversified customer base and long-standing relationships with large customers, cost-pass through provisions in sales contracts, albeit with lags and exposure to the more stable food packaging sector. The company is projected to have good liquidity.

Novolex is expected to have good liquidity supported by positive free cash flow generation and availability under its $500 million multi-currency revolving credit facility due on December 29, 2022. Novolex had $129 million of cash on hand and $488 million of availability on the revolver as of December 31, 2018. The revolver has a springing maximum 7.0x first lien net leverage ratio test that is triggered when more than 35% of the revolver is drawn. Given projected free cash flow generation, we do not expect the company to have significant borrowings under the revolver. There are no financial maintenance covenants in the term loan. Peak working capital use is in the second and third calendar quarters due to the seasonal build of inventory. The revolver is the nearest maturity and the company only has manageable annual term loan amortization totaling 1% of the principal amount paid quarterly or approximately $30 million per year. Most assets are encumbered by the senior secured credit facilities, leaving few sources of alternative liquidity.

The stable outlook reflects expectations of modest EBITDA growth and continued free cash flow generation that will support the company's liquidity and deleveraging.

We could upgrade the rating if the company demonstrates debt pay-down and reduces Debt/EBITDA below 6.0 times on a sustained basis, improves EBITDA/Interest coverage to 3 times and funds from operations to debt sustainably above 8%.

We could downgrade the rating if the company's operating performance deteriorates, Debt/EBITDA remains above 7x, EBITDA/Interest falls below 1.5 times, funds from operations to debt fall below 6% and free cash flow turns negative.

Headquartered in Hartsville, South Carolina, Flex Acquisition Company, Inc., which is doing business as Novolex, is a manufacturer of paper and plastic packaging products, ranging from bags for grocery, retail and food service markets to can liners, specialty films and lamination products, rigid food packaging and environmentally friendly packaging products. The company has 62 manufacturing plants and pro forma sales of approximately $3.7 billion as of December 2018. Novolex, has been a portfolio company of The Carlyle Group since December 2016.

The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass, and Plastic Containers published in May 2018. 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 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.

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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