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Rating Action:

Moody's downgrades VAC to B3, negative outlook

13 Dec 2019

Frankfurt am Main, December 13, 2019 -- Moody's Investors Service ("Moody's") 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 New VAC Intermediate Holdings BV (VAC). Concurrently Moody's downgraded to B3 from B2 the instrument ratings of VAC Germany Holdings GmbH. The outlook on the ratings is negative.

RATINGS RATIONALE

"Moody's decision to downgrade VAC's ratings by one notch was triggered by a steady decline in revenues during 2019, which accelerated in Q3 and reached 11.8% to date (January to September). In addition to the topline decline, restructuring measures and other one-off items weigh on profitability, cash flow generation and other key credit metrics as adjusted by Moody's resulting in a leverage of 9.1x Debt / EBITDA as of September 2019," said Oliver Giani, lead analyst for VAC at Moody's. "Moody's no longer expects VAC to meet the trigger levels previously set for the B2 rating category over the next few quarters", Mr. Giani continues. "The softening industrial environment, which lead us to change our industry outlook for the global manufacturing industry to negative from stable in September, may create additional challenges for VAC," he added.

During 2019 VAC has been hit by an adverse market environment in several of its end markets, most notably in automotive, which accounted for about one quarter of revenues in that period. So far, measures taken by management to adjust the cost base, were not sufficient to balance the resulting negative effect on profitability and cash flow generation.

STRUCTURAL CONSIDERATIONS

The $30 million revolver is pari passu with the $225 million first-lien term loan. Both the revolver and the term loan are rated B3, which reflects the credit facility comprising most of the debt in the capital structure before giving effect to the pension. VAC Germany Holdings GmbH (the German borrower) and New VAC US LLC (the US borrower) hold instrument ratings that are consistent with the CFR. Under a default scenario, we expect the recovery of the credit facility to be in line with that represented by the CFR partly because of the guarantee from New VAC Intermediate Holdings BV.

ESG CONSIDERATIONS

We take into account the impact of ESG factors when assessing companies' credit quality. The main environmental and social risks are not material in case of VAC. However, the company is controlled by private equity company Apollo Global Management, LLC, and we expect VAC's financial policy to favour shareholders over creditors as evidenced by its high leverage. However, in the near-term the company foresees no dividend distribution and targets deleveraging instead. Our understanding is that large M&A deals are not excluded, but unlikely in the near term.

LIQUIDITY

Concerned by EUR24 million negative free cash flow during the first nine months of 2019 and limited visibility, Moody's considers the company's liquidity position to be just adequate. As per end of September 2019 VAC reported a cash balance of EUR11 million and EUR23 million availability under its $30 million (EUR 27 million) revolving credit facility, which is subject to a springing leverage covenant of 5.35x, to be tested if drawings exceed 35% of the facility. While these liquidity sources, combined with projected FFO generation, are sufficient to accommodate working capital swings and cover forecasted capital expenditures as well as upcoming debt maturities in the next 12 months, VAC has still some headroom for possible underperformance. No significant debt repayments are due until 2025 when the company's Term Loan B matures.

OUTLOOK

The negative outlook reflects the challenge for VAC to sustainably restore profitability towards historical level and thus to manage key credit metrics improving to a level commensurate with the B3 rating category. This would also require the company to strengthen the liquidity position, which currently suffers from a negative free cash flow generation and tightening covenant headroom. While the pipeline of new products and the contribution from the cost reduction measures will be supportive, further headwind is expected to come from the development of the pension liability, which represents 45% of VAC's Moody's adjusted debt and which Moody's expects to increase as a result of the low interest rate environment.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider a further downgrade if the company is unable to stop the negative trend in operating performance seen in 2019 indicated by a further decline of Moody's adjusted EBITA margin from the current level of around 8%. Likewise, a further weakening of liquidity, negative FCF for a prolonged period of time leading to tightened covenant headroom or failure to swiftly reduce leverage from the current elevated level towards 7.0x debt/EBITDA by year-end 2020 could trigger a negative rating action.

Albeit currently unlikely, Moody's would consider an upgrade action should VAC manage to sustainably improve its adjusted EBITA margin towards 10% (8% per September 2019), reduce its gross adjusted debt/EBITDA below 5.75x on a sustainable basis, generate meaningful positive FCF and maintain an adequate liquidity profile with sufficient covenant headroom at all times.

COMPANY PROFILE

New VAC Ultimate Holdings BV is the top holding company in the organization structure. The B3 corporate family rating (CFR) with negative outlook is located at the guarantor of the issued debt at New VAC Intermediate Holdings BV. This entity lies below New VAC Ultimate Holdings BV, which in turn is the indirect parent of the co-borrowers VAC Germany Holdings GmbH and New VAC US LLC.

The company focuses on special magnetic materials and components, and serves key global markets, including automotive systems, industrial automation and the medical community. Headquartered in Hanau, Germany, the company reports in euros. The company operates manufacturing facilities in the Americas, Europe and Asia. We expect its total annual revenue for 2019 to be around €360 million.

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.

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.

Oliver Giani
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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