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Rating Action:

Moody's rates New VAC Intermediate Holdings BV (VAC) CFR at B2; Stable Outlook

13 Feb 2018

Approximately $230 million of rated debt affected

New York, February 13, 2018 -- Moody's Investors Service, ("Moody's") assigned a Corporate Family Rating (CFR) at B2 and a Probability of Default Rating (PDR) at B2-PD to New VAC Intermediate Holdings BV (VAC). Moody's assigned a B2 rating to the proposed $230 million senior secured credit facility being issued by VAC Germany Holdings GmbH with New VAC US LLC as a co-borrower. Proceeds from the issuance along with a portion of the proceeds from the sale of EaglePicher Technologies will fund the repayment of the current Vectra Co. debt that was issued out of Duke Finance, LLC. Consequently, all ratings at Duke Finance, LLC will be withdrawn at the close of the transaction. The rating outlook is stable.

Moody's assigned the following ratings:

New VAC Intermediate Holdings BV:

Corporate Family Rating, at B2;

Probability of Default, at B2-PD.

The rating outlook is stable.

The following ratings were assigned at VAC Germany Holdings GmbH and also at New VAC US LLC:

GTD senior secured credit facility rated B2 (LGD3).

The rating outlook for VAC Germany Holdings GmbH is stable.

RATINGS RATIONALE

The assignment of a B2 CFR to New VAC Intermediate Holdings BV reflects its high financial leverage, short operating history as a stand-alone company, and ongoing pressure to reduce costs. VAC benefits from global coverage with Europe representing over 60% of revenues and the Asia-Pacific region expected to exceed 25% of revenue. The company focuses on specialty engineering around its special magnetic materials and components, and has minimal customer concentration. Moreover, VAC often has an entrenched position with customers because once it is contracted it is often maintained as the supplier for the duration of the end product. Moody's anticipates demand for its niche product offerings to grow over the intermediate term, with improving margins and positive free cash flow generation as a result.

The rating benefits from the ongoing opportunity to improve its already solid margins by expanding its manufacturing in lower cost countries. The rating is constrained by significant leverage with debt-to-EBITDA of almost 7.0 times on a Moody's adjusted basis due in part to its relatively large underfunded pension totaling over $200 million. The company's relatively small revenue base along with significant product concentration after the sale of EaglePicher is considered a ratings negative.

The B2 rating on the senior secured credit facility issued by co-borrowers VAC Germany Holdings GmbH and by New VAC US LLC reflects the credit facility comprising the majority of the debt in the capital structure before giving effect to the pension which we view as an unsecured claim. In a default scenario, we believe the credit facility's recovery would be in line with that represented by the CFR due in part to the guarantee from New VAC Intermediate Holdings BV.

A portion of the proceeds from the EaglePicher Technologies sale along with the $200 million new first lien term loan will be the primary sources to fund the repayment of the existing $480 million first lien term loan at Duke Finance, LLC. The new capital structure will be mostly debt financed.

The ratings could be upgraded if the company reduces debt-to-EBITDA leverage to under 5.0 times on a sustainable and Moody's adjusted basis. A track record of improving margins would also be necessary in order for the ratings to be upgraded.

The ratings could be downgraded if a dividend resulted in higher leverage or if the company experienced margin weakness. The ratings could also be downgraded if the company fails to make progress towards deleveraging to below 6.25 times over the next 12 months. Although we anticipate slow revenue growth, a contraction in sales or EBITDA could pressure the ratings.

VAC Germany Holding GmbH, along with its co-borrower New VAC US LLC operate under New VAC Holdings TopCo BV, with Apollo as the controlling shareholder. The company focuses on specialty magnetic materials and components serving key global markets, including automotive systems, industrial automation, and the medical community. Headquartered in Hanau Germany, it will be reporting in Euros. The company operates manufacturing facilities in Europe and Asia. Total annual revenues are anticipated for 2018 to be below $500 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 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.

Paul Aran
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

Robert Jankowitz
MD - Corporate Finance
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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