Hong Kong, June 18, 2019 -- Moody's Investors Service has downgraded Pearl Holding III Limited's
(Pearl III) corporate family rating (CFR) and senior secured bond rating
to B2 from B1.
At the same time, Moody's has revised the outlook to negative
from stable.
RATINGS RATIONALE
"The downgrade was prompted by our expectation that Pearl III's
profitability and financial leverage will remain weak during 2019-20,
because of the weaker sales and earnings contributions in its automotive
and consumer electronics segments," says Wan Hee Yoo,
a Moody's Vice President and Senior Credit Officer.
"While the company has been implementing cost-cutting measures,
whether Pearl III can improve profitability meaningfully has yet to be
proven, because of the uncertain demand prospects from end markets,"
adds Yoo.
In 2019, Moody's expects Pearl III's annual revenue
to decline by 10%-12% and adjusted EBITDA to decrease
by around 25% versus the levels in 2018 — before a modest
recovery in 2020 — because of soft demand from its major end markets.
Consequently, Moody's expects Pearl III's adjusted gross
debt/EBITDA to increase to about 6.5x-7.0x in 2019
and stay elevated at 5.5x-6.0x in 2020. This
level of financial leverage is weak even for the B2 ratings category,
particularly given its small scale.
Moody's also expects Pearl III to report negative free cash flow
in 2019, because of its weaker earnings as well as still sizable
restructuring expenses and capital spending. Such restructuring
expenses and capital spending should decrease in 2020 upon the completion
of its major consolidation initiatives during 2019.
Pearl III's adjusted debt/EBITDA increased to around 5.1x
in 2018 from Moody's estimate of 4.5x for 2017 — representing
pro forma figures and assuming full-year earnings contribution
from Fischer Tech Ltd., which it acquired in November 2017
— mainly because of weaker earnings stemming from sluggish sales
from the automotive segment and cost pressures.
According to the company, revenue and adjusted EBITDA fell 20%
and 57% respectively in 1Q 2019 compared to the same period a year
earlier.
The rating action also considers Moody's expectation that Pearl
III will maintain an adequate liquidity profile over the next 12 months,
but its liquidity buffer will fall further in 2019 because of moderate
operating cash flow, still sizable capital spending and restructuring
expenses.
Pearl III's B2 ratings continue to incorporate its small scale,
the fragmented and competitive nature of the tooling and molding markets,
customer and business concentration, as well as the company's
moderate financial leverage and weak interest coverage.
These weaknesses are partly mitigated by the company's diversified
end markets and long-standing customer relationships.
Moody's also notes that Pearl III is exposed to a certain degree
of governance risk, given its full ownership by a private equity
firm, with such firms typically adopting more aggressive financial
policies.
The rating on the senior secured notes is not higher than the company's
CFR, because this debt will constitute the vast majority of Pearl
III's outstanding debt; implying limited junior cushions in
its liability structure.
The negative outlook reflects Moody's expectation that Pearl III's
financial leverage will remain elevated over the next 1-2 years.
The outlook could return to stable, if the company improves its
financial profile through higher earnings, such that (1) its adjusted
gross debt/EBITDA stays below 5.0x-5.5x on a sustained
basis; and (2) Pearl III maintains a good liquidity profile.
Moody's could downgrade the ratings if the company's earnings
remain weak, such that adjusted gross debt/EBITDA remains above
5.0x-5.5x on a sustained basis, or if the company's
liquidity profile weakens further, such that its internal sources
and committed credit facilities are insufficient to cover cash requirements
over the next 12 months.
The principal methodology used in these ratings was Global Manufacturing
Companies published in June 2017. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
Pearl Holding III Limited (Pearl III) is a precision engineered plastic
components producer, mainly engaged in the manufacture and sale
of plastic injection molds and related products.
In November 2017, the company acquired Singapore-based Fischer
Tech Ltd., a former Singapore Exchange-listed manufacturer
of precision engineering plastic components.
Pearl III is an indirectly wholly owned subsidiary of Platinum Equity,
LLC, a private equity firm, headquartered in Los Angeles.
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.
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
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Please see www.moodys.com for any updates on changes to
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for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating
and the last name below is the person primarily responsible for approving
this Credit Rating.
Wan Hee Yoo
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
