Milan, May 01, 2020 -- Moody's Investors Service (Moody's) has today downgraded to B3 from
B2 the corporate family rating (CFR) and to B3-PD from B2-PD
the probability of default rating (PDR) of the Dutch Returnable Transit
Packaging manufacturer Schoeller Packaging B.V. (Schoeller).
Concurrently, Moody's has downgraded the rating on its €250
million senior secured notes due in 2024 issued by Schoeller to B3 from
B2. The outlook on the ratings is negative.
"We have downgraded Schoeller's ratings to reflect a weaker than
expected 2019 operating performance and the likely contraction in the
company's earnings in 2020 due to the coronavirus outbreak and the resulting
further deterioration in its credit metrics and liquidity over the next
12 months with limited visibility over a potential recovery, "says
Donatella Maso, a Moody's Vice President - Senior Analyst
and lead analyst for Schoeller.
The list of affected ratings can be found at the end of this press release.
RATINGS RATIONALE
Today's rating action reflects Moody's view that Schoeller will face challenging
operating conditions across Europe and the US, where the company
generates almost all of its revenues. Moody's forecasts a deep
recession in these regions in 2020 that will diminish demand for Schoeller's
products, particularly in more vulnerable end-markets such
as auto and industrial manufacturing, with an effect on its earnings,
cash flow generation and credit metrics. The purchase of Schoeller's
products is typically seen as a capital investment, and is therefore
subject to deferral by its customers during periods of a severe downturn.
Moreover, in Moody's view there is low visibility on demand recovery
which will ultimately depend on the evolution of the macroeconomic conditions
once the lockdowns and social distancing measures are lifted.
However, Moody's recognizes that Schoeller is present in certain
end-markets such as food retail and pooling services, amongst
other, which could benefit from the current situation and,
that management is actively seeking ways to protect the company's
earnings and preserve cash by avoiding unnecessary costs and delaying
certain non-essential investments. Moreover, Moody's
also understands that YTD trading is above prior year.
Schoeller's operating performance in 2019 was weaker than budget
and Moody's expectations both at revenue and EBITDA level largely
due to a shortfall in new product sales. In addition, Schoeller's
debt increased significantly following the bond refinancing occurred last
October and the raise of additional bank debt. As a result,
the company's financial leverage, measured as debt to EBITDA
as adjusted by Moody's, rose to 6.1x in 2019 (including bank
overdrafts) compared to a maximum of 5.0x allowed by the previous
B2 rating. Moody's expects Schoeller's leverage will
further deteriorate in 2020 and will remain elevated also in 2021.
Free cash flow generation in 2019 continued to be negative, primarily
from higher investments in new products and ongoing lease repayments.
In addition, although Moody's expects free cash flow to improve,
due to lower interest expense and deferral of certain expenses,
this will remain negative in 2020-2021. Failure to return
free cash flow generation into positive territories might put pressure
on the sustainability of the company's capital structure in the
medium term.
The B3 rating is also constrained by (1) the relatively small size of
the company relatively to other rated packaging manufacturers; (2)
the highly competitive industry in the context of the commoditised nature
of the company's products resulting in pricing pressure; (3)
some concentration with its largest client; and (4) the required
investments in new products and customised moulds in order to support
future growth.
Conversely, the B3 rating is positively supported by (1) Schoeller's
leading market position in the Returnable Transit Packaging (RTP) sector
in Europe with an estimated 20% share; (2) its innovation
capabilities enabling the company to benefit from the continuous positive
trends in the sector; and (3) a degree of geographic and end-market
diversity.
ENVIRONMENTAL, SOCIAL & GOVERNANCE (ESG) CONSIDERATIONS
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety. The weaknesses in Schoeller's credit profile,
including its exposure to cyclical end markets and multiple affected countries
have left it vulnerable to shifts in market sentiment in these unprecedented
operating conditions and the company remains vulnerable to the outbreak
continuing to spread. Today's action reflects the impact
on Schoeller of the breadth and severity of the shock, and the broad
deterioration in credit quality it has triggered.
In terms of corporate governance, Schoeller is controlled by the
private equity firm Brookfield Business Partners L.P. (Brookfield),
which in common with other financial sponsors typically has tolerance
for relatively high leverage in the companies it controls. However,
more positively, Brookfield has demonstrated to support the business
by providing a €65 million facility which the company has partly
utilized to fund growth investments.
LIQUIDITY
Moody's views Schoeller's liquidity profile as currently adequate.
It is underpinned by (1) approximately €41 million cash on balance
sheet at the end of 2019; (2) €25 million availability under
its €30 million super senior revolving credit facility (RCF) due
2024, albeit expected to be fully drawn by the end of Q1 2020;
and (3) several factoring arrangements, which are to be renewed
in order to manage intra-year fluctuations in receivables.
The company also benefits from a €65 million committed stand-by
facility in the form a subordinated shareholders' loan provided by Brookfield,
currently drawn for €7.6 million and treated as equity under
Moody's hybrid methodology. These sources are deemed sufficient
to cover the company's near term needs because certain costs and
other non-essential investments could be deferred and there is
no debt amortization until 2024, when the RCF is due. Prolonged
negative free cash flow would, however, put pressure on the
company's liquidity.
The super senior RCF has a springing covenant (maximum net drawn super
senior leverage of 1.0x), which is tested when the RCF is
drawn by more than 40%. Moody's expects the company
to continue to comply with this covenant.
STRUCTURAL CONSIDERATIONS
Using Moody's Loss Given Default (LGD) methodology, the B3-PDR
is aligned to the B3 CFR. This is based on a 50% recovery
rate at family level, as is typical for transactions including both
bonds and bank debt. The B3 rating on the notes reflects the fact
that they represent the majority of the debt in the capital structure
and the size of the RCF is not sufficiently large to allow any notching.
Both the notes and the super senior RCF share the same security and guarantees
but the notes rank junior to the RCF upon enforcement under the provisions
of the intercreditor agreement. Security includes pledges over
shares, bank accounts, receivables, and certain UK assets.
Material subsidiaries which guarantee the notes represent c. 83%
of the group EBITDA or c.81% total assets.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook reflects the current uncertainty on Schoeller's ability
to improve its credit metrics and restore its free cash flow generation
during 2021. This is because of the low visibility into the company's
operating performance over the next 12-18 months while it may temporarilyexceed
the 6.5x leverage threshold for the B3 rating category in 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade is unlikely in the near term.
The outlook could be changed to stable if the company's performance
shows signs of recovery, in line with improving trading conditions.
In the medium term, upward pressure on the ratings could develop
if Schoeller's credit metrics were to improve as a result of a stronger-than-expected
operational performance, leading to Moody's adjusted debt/EBITDA
trending towards 5.0x, and to sustained positive free cash
flow (as defined by Moody's).
Negative pressure on the ratings could arise if Schoeller's operating
performance deteriorates materially; Moody's adjusted debt/EBITDA
remains sustainably above 6.5x; free cash flow continues to
be significantly negative; or its liquidity further weakens.
LIST OF AFFECTED RATINGS:
Downgrades:
..Issuer: Schoeller Packaging BV
.... LT Corporate Family Rating, Downgraded
to B3 from B2
.... Probability of Default Rating,
Downgraded to B3-PD from B2-PD
....Backed Senior secured Regular Bond/Debenture,
Downgraded to B3 from B2
Outlook Actions:
..Issuer: Schoeller Packaging BV
....Outlook, Remains Negative
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Packaging Manufacturers:
Metal, Glass, and Plastic Containers published in May 2018
and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120393.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
COMPANY PROFILE
Headquartered in the Netherlands, Schoeller is a returnable transit
plastic packaging manufacturer operating primarily in Europe and the US,
employing approximately 2,000 people. In 2019, the
company generated revenue of €536 million and EBITDA of €64
million as adjusted by Moody's.
The company is the result of the August 2013 legal integration between
the Schoeller Arca Systems Group and the Linpac Allibert Group,
the returnable transport packaging business of Linpac Group. Since
May 2018, Schoeller is 70% owned by the private equity Brookfield
Business Partners L.P. and 30% by the Schoeller Industries
B.V., a family-owned business with a broad
focus on packaging, transport and logistics systems.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
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.
Donatella Maso
Vice President - Senior Analyst
Corporate Finance Group
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Italia S.r.l
Corso di Porta Romana 68
Milan 20122
Italy
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
