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Rating Action:

Moody's rates Adler Pelzer's notes issuance B3

10 May 2021

Frankfurt am Main, May 10, 2021 -- Moody's Investors Service ("Moody's") has today assigned a B3 instrument rating to the proposed €75 million guaranteed senior secured notes issuance to the existing €350 million guaranteed senior secured notes due in 2024, issued by Adler Pelzer Holding GmbH ("Adler Pelzer" or " the group"). The B3 corporate family rating (CFR) of Adler Pelzer and all other existing ratings remain unaffected. The outlook remains stable.

RATINGS RATIONALE

The proceeds of the issuance will be used for general corporate purposes including the potential funding of Adler Pelzer's acquisitions of the acoustics and soft trim (AST) business of Faurecia and the hard trim activities of the STS Group, announced earlier this year. Pro forma for the notes issuance and consolidation of the acquired businesses, including assumed legacy debt, pension and lease obligations, the group's Moody's-adjusted gross leverage increases by around 0.7x, which already exceeded Moody's 5x-6x guidance for a B3 rating at the end of September 2020 (6.4x). However, Moody's recognizes the sound rationale of the acquisitions from a market position and business profile perspective, and the promising synergy potential. In particular, the acquired operations will broaden Adler Pelzer's geographic presence in Europe (France) and Asia (China), strengthen its existing client relationships and provide access to new customers, while complementing its product offering. Synergies identified by the group relate to raw material procurement and the vertical integration into certain semi-finished products of AST, among others. Even though being margin dilutive for Adler Pelzer at the time of first consolidation, the expected realization of synergies and integration benefits (proximity to customers, best practice and knowledge sharing, optimization of operations) should help improve the group's profitability to solid levels for the B3 rating (Moody's-adjusted EBITA margin above 4%) over the next two years (2.4% for the 12 month ended 30 September 2020). The expected margin expansion, additionally supported by improving capacity utilization with Moody's forecast growth in light vehicle sales by 7% in 2021 (6.1% in 2022), should enable Adler Pelzer to strongly improve its EBITDA and, correspondingly, reduce its leverage towards 5x gross debt/EBITDA over the next 12-18 months.

The proposed notes issuance will also slightly improve Adler Pelzer's liquidity profile, which Moody's continues to regard as merely adequate, given the absence of committed credit facilities, expected negative Moody's-adjusted free cash flow in 2021 and sizeable debt maturities over the next 12-18 months.

The B3 corporate family rating (CFR) further reflects as positives the group's (1) well established position as a leading automotive supplier of products for noise, vibration and harmonics (NVH) applications in light passenger vehicles; (2) long-term and well-established relationships with a diverse mix of original equipment manufacturers (OEMs); (3) history of revenue growth in excess of global light vehicle production; (4) positive exposure to the trend towards electrified vehicles; (5) a general commitment of the main shareholder to support the company, if needed.

Nevertheless, the rating also reflects as negatives Adler Pelzer's (1) relatively small size with revenue of around €1.2 billion in 2020, although increasing to over €1.7 billion following the AST and STS acquisitions; (2) exposure to fluctuating commodity prices; (3) exposure to the cyclicality of the automotive end-market, which has been facing several headwinds since 2019 and a steep decline in 2020 in the wake of the coronavirus pandemic; (4) mostly negative free cash flow generation in recent years, driven by high growth investments, and (5) elevated financial leverage, with Moody's adjusted debt/EBITDA of over 7x as of 30 September 2020 pro forma for the new notes issuance, which currently exceeds Moody's guidance for a B3 rating.

LIQUIDITY

Moody's considers Adler Pelzer's liquidity as merely adequate. The group's liquidity sources consist of €145 million of cash on the balance sheet as of 31 December 2020, which Moody's understands is unrestricted, and projected annual funds from operations (FFO) increasing to €110-120 million over the next 12-18 months.

Adler Pelzer's main liquidity uses include significant short-term bank borrowings of €128 million at the end of 2020, and capital spending (Moody's-adjusted, including lease liability payments) of around €90 million in 2021. Moody's understands that the group is not planning to pay any dividends to its shareholders. Moody's assumes around €40 million of working cash (3% of revenues), which is tied up to run the business.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's expectation that Adler Pelzer will reduce its leverage and improve profit margins to adequate levels for the B3 rating, driven by the strong market recovery in 2021 and the gradual realization of synergies related to its recent acquisitions. More specifically, Moody's expects the group's EBITA margin (Moody's adjusted) to expand to over 4% and leverage to reduce towards 5x gross debt/EBITDA (Moody's-adjusted) over the next 12-18 months. The stable outlook also incorporates the expectation of Adler Pelzer to at least maintain its currently just adequate liquidity profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

Positive pressure on Adler Pelzer's rating would build if the group could sustainably (1) reduce its Moody's-adjusted debt/EBITDA ratio to below 5x, (2) improve its Moody's-adjusted EBITA margin to over 4%.

Negative rating pressure would build if Adler Pelzer failed to progressively restore its recently weakened Moody's-adjusted credit metrics in line with the B3 rating in the coming months (e.g. EBITA margin of at least 3% and leverage not higher than 6x gross debt/EBITDA). Moody's would further consider a downgrade if Adler Pelzer's liquidity started to contract.

PRINCIPAL METHODOLOGY

The principal methodology used in this rating was Automotive Supplier Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Adler Pelzer Holding GmbH (Adler Pelzer) is a global automotive supplier headquartered in Hagen, Germany. Adler Pelzer is a global leader in the design, engineering and manufacturing of acoustic and thermal components and systems for light passenger vehicles. Its largest product family is for passenger compartments, which includes floor trim, door shields, seals and felt and foam insulation parts. Adler Pelzer also produces panels and trims for the engine compartment and the trunk. In 2020, the group generated revenue of around €1.2 billion and EBITDA of around €138 million (as defined and reported by the company, including IFRS16). Adler Pelzer is a wholly owned subsidiary of Adler Group S.p.A. which is controlled by Adler Plastic S.p.A., which owns 71.93% of the Company, and FSI SGR SpA, which bought a share of 28.07% in May 2018.

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 rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

This rating is 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Goetz Grossmann, CFA
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

Anke Rindermann
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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