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Rating Action:

Moody's upgrades Composite Resins (AOC) to B1, stable outlook

11 Dec 2020

Frankfurt am Main, December 11, 2020 -- Moody's Investors Service (Moody's) has today upgraded the corporate family rating (CFR) to B1 from B2 and the probability of default rating (PDR) to B1-PD from B2-PD of Composite Resins Holding BV (CR). Concurrently, Moody's has upgraded to B1 from B2 the rating of the $510 million senior secured term loan B (TLB) and $90 million senior secured revolving credit facility (RCF) and assigned a B1 rating to the €25 million add-on to the TLB issued by Composite Resins Subholding B.V..The outlook for both entities remains stable.

RATINGS RATIONALE

The upgrade to B1 was prompted by the strong operating performance of CR in its fiscal year (FY) 19/20 ending 30 September 2020 with an EBITDA increase of $47.6 million, or 32% year-on-year, to $194.3 million (company-defined). CR achieved the EBITDA increase during a challenging period when it lost 11% of its annual volumes and dealt with an adverse macro environment caused by the coronavirus outbreak. The volume recovery by region has been very uneven mid-2020 with the Asia region exhibiting strong annual volume growth of 10% whilst EMEA has witnessed a decline by about 22%. Moody's expects the EMEA region to revert back to growth from fiscal Q3 2021 (calendar Q2) onwards although EMEA on a relative basis is likely to exhibit the lowest growth rates after the Americas and Asia.

EBITDA generation in FY20/21 will be supported by (i) the contribution of the maleic anhydride asset that CR bought from Ashland for $98.3 million and that has a pro-forma annual EBITDA contribution of around $25 million; and (ii) operating leverage once volume growth resumes across all regions. While keeping fixed costs and SG&A costs at FY19/20 level, future volume growth will result in cost absorption and contribute to incremental EBITDA. Consequently, Moody's expects gross leverage to decline further from FY19/20 levels of around 2.9x (Moody's-adjusted) to around 2.5x by FY20/21, positioning the company point-in-time strongly in the B1 rating category. The B1 CFR incorporates headroom for a reversal of EBITDA margins towards the mid-teens (%) and for debt-funded acquisitions or dividends.

The market for unsaturated polyester resins (UPR) in the mature regions N. America and Europe has been highly concentrated since the mergers of AOC and Aliancys to form CR in 2018 and of Polynt and Reichhold to form Specialty Chemicals International B.V. in 2017. The concentrated market structure and rationale behaviour has helped in Moody's opinion with price discipline in the UPR market and has supported the EBITDA margin expansion from levels of around 10-12% towards 20%. Given the high levels of market concentration in excess of 90% in N. America and above 70% in Europe, Moody's expects only bolt-on acquisitions in these markets. Larger, transformational transactions are likely in adjacent, non-UPR products where antitrust constraints are lower.

CR's liquidity is strong. Cash and cash equivalents at 30 September 2020 were $163.4 million and already reflect the $69.2 million of cash that were used to fund the acquisition of the maleic anhydride asset. $89.7 million of the $90 million RCF were available. Based on incremental EBITDA generation in the current fiscal year, limited investment requirements of around 2.3% of annual sales, CR should remain highly cash generative with Moody's-adjusted free cash flow to exceed $100.0 million.

The company is controlled by funds managed by CVC, which, as is often the case in private equity sponsored deals, have typically a higher tolerance for leverage and governance is comparatively less transparent. CR in FY18/19 paid out a $75 million dividend from excess cash. In the absence of M&A Moody's expects that excess cash CR holds will be paid out in further dividends.

RATIONALE FOR STABLE OUTLOOK

The outlook is stable and assumes that CR maintains Moody's-adjusted gross leverage of between 3.0x-4.0x and EBITDA margins in the 15%-20% band.

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

Moody's could upgrade ratings if (i) the EBITDA margin increased to above 20%; (ii) debt/EBITDA was sustainably below 3.0x; and (iii) CR maintained a strong liquidity profile.

Moody's could downgrade ratings if (i) the EBITDA margin declined to below 15%; (ii) debt/EBITDA increases to above 4.0x on a sustained basis; and (iii) liquidity weakened.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

CR, with headquarters in the Netherlands, is also known under its brand name AOC. It produces and supplies polyester and vinyl ester resins and other solutions for applications in Coatings & Protective Barriers, Colorants and Visual Effects, Adhesives and Specialties and Conventional Composite Resins. Preliminary EBITDA in fiscal year 2019/2020 ending 30 September 2020 was $194.3 million on net sales of $958.5 million. Funds of CVC own 61.1% of CR, with an entity owned by Royal DSM NV (A3 stable) holding 17.5%, management 12.5% and FHH Enterprise Inc. 8.9%.

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.

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.

Martin Kohlhase
VP - Senior Credit Officer
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

Matthias Hellstern
MD - Corporate Finance
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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