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Rating Action:

Moody's upgrades Orion to Ba2 from Ba3, stable outlook

15 Nov 2018

London, 15 November 2018 -- Moody's Investors Service, ("Moody's") has today upgraded the corporate family rating (CFR) of rubber and specialty carbon black manufacturer Orion Engineered Carbons S.A. (Orion) to Ba2 from Ba3. Concurrently Moody's upgraded Orion's probability of default rating (PDR) to Ba2-PD from Ba3-PD. Moody's has also upgraded to Ba2 from Ba3 the rating of the term loan facilities and of the €175 million multi-currency revolving credit facility ('RCF') borrowed by Orion Engineered Carbons GmbH and OEC Finance US LLC, two indirect subsidiaries of Orion. The outlook on all ratings is stable.

RATINGS RATIONALE

The upgrade of Orion's CFR to Ba2 acknowledges the positive track record of the company over the last two years with solid financial metrics and liquidity profile, which Moody's deems commensurate with the higher CFR. In addition, the company is now fully listed on the New York Stock Exchange and despite the announcement of a $40 million share buy back program, has a quite conservative financial policy with a net debt leverage target ratio of between 2x and 2.5x.

Over the last three years the company has improved its Moody's adjusted EBITDA to $250 million in 2017 from $220 million in 2015 maintaining its Moody's adjusted EBITDA margin in the high teens. The EBITDA improvement mostly results from the improved cost base, the effective raw material price increase pass through to customers and the improved product mix with a greater share of specialty products. The higher EBITDA, in combination with a voluntary debt repayment made in 2017 led to a decrease of the Moody's adjusted leverage to 2.9x at the end of 2017 from 3.2x at the end of 2016. Moody's believes that the company will be able to maintain its solid profitability over the next 12-18 months, keeping its Moody's adjusted leverage at around 2.5x.

Orion's business profile is further strengthened by the capacity increase in specialised carbon black products where it can extract higher pricing than in the more commoditised parts of the rubber business. The specialty segment has grown both organically through debottlenecking and through targeted bolt-on acquisitions, the most recent being the acquisition of French acetylene carbon black manufacturer Société du Noir d'Acétylène de l'Aubette, SAS (SN2A) closed on 31st October 2018. The company should continue to benefit from the demand growth in specialty products driven by more demanding applications and higher quality specification in the automotive and coating industries.

The CFR is supported by Orion's (1) strong market position as the global leader in the specialty carbon black segment and as the third largest global producer of rubber carbon blacks; (2) long-standing relationships with blue-chip customers; (3) well maintained and flexible manufacturing asset base spread across the key regions of North and Latin America, Europe and Asia; (4) continued progress with regard to the percentage of customer contracts containing indexed pricing formulas and raw material price surcharge mechanisms to enable a timely and efficient cost-pass through; and (5) solid operating profitability, with an adjusted EBITDA margin in the high teens.

The CFR however reflects (1) Orion fairly modest scale, with revenues of approximately $1.3 billion in 2017; (2) the cyclicality of its rubber carbon black profitability given an exposure to the automotive market; (3) a high level of customer concentration in the rubber carbon black business, where the top five customers are global tire manufacturers which accounted for approximately 48% of 2017 rubber carbon black sales volumes, although about 70% of tire demand is for replacement tires rather than new; and (4) the carbon black production's dependency on availability of a range of feedstock (carbon black oil, crude coal tar and coal tar distillate), which are by-products of refineries and coking plants. Feedstock prices are volatile being correlated to oil price, but typically passed through to customers via contractual agreements.

Moody's expects that the company will be able to maintain its strong operating profitability for 2018 with Moody's adjusted EBITDA between $305 million and $315 million. This should translate into solid operating cash flows, with Moody's adjusted funds from operations (FFO) anticipated between $220 million and $230 million. However, due to a combination of high working capital requirements estimated of around $75 million, capital expenditures of around $125 million (excluding acquisitions) and dividend payments of $47 million, the company's Moody's adjusted free cash flow (FCF) is expected to be neutral to $25 million negative. Orion's cash balance should remain adequate and expected to range between $35 million and $55 million.

For 2019 Moody's expects the company's Moody's adjusted EBITDA to range between $310 million and $325 million, supported by good market conditions and improved pricing achieved in the rubber segment for 2019 contracts. Moody's adjusted EBITDA margin should remain in the high teens. Moody's adjusted FFO is assumed to range between $215 million and $240 million. Moody's expects working capital requirements to ease but to remain at around $45 million and expects continued higher than historical capital expenditure of around $160 million because of the capacity expansion in Italy and environmental clean-up expenses in the US. Orion's Moody's adjusted FCF is expected to be negative in 2019 at around $35 million. FCF is also adversely impacted by the payment of the $47 million dividend.

Moody's does not expect the company to remain FCF negative in 2020 because of expectations of more modest working capital requirements and reduction of the capital expenditure to pre growth expansion programs of around $95 million as the larger projects would have ended.

LIQUIDITY

Orion's liquidity position is solid and underpinned by cash balance expected to range between $35 million and $45 million at year end pro forma for the French acquisition payment of about $35 million and a large and undrawn RCF of €175 million. There is no refinancing risk until 2021 when the RCF matures. The term loans maturity has been extended to July 2024. Moody's expects Orion to be in compliance with its only financial covenant (Net Debt/EBITDA ratio), if the ratio needs to be tested on the RCF, which would only happen if the facility is drawn above a 35% threshold.

RATIONALE FOR STABLE OUTLOOK

Orion's stable outlook reflects Moody's view that the company will continue to operate at satisfactory margin levels, with Moody's adjusted leverage ratio expected to remain at around 2.5x in the next 12-18 months. The stable outlook also assumes that the company will maintain its solid liquidity profile.

STRUCTURAL CONSIDERATIONS

The Ba2 rating on the senior secured bank facilities (term loan facility and RCF) is in line with the CFR and reflects the dominant position of these debt instruments in the current capital structure of Orion.

What Could Change the Rating Up

Moody's views a potential upgrade limited in the short term by the company's relatively small size. However, an upgrade could be considered in case of (1) continued growth of the share of specialty segment in the company's product mix that would enhance its profitability resilience through the cycle while achieving a larger revenue size; (2) Moody's adjusted debt/EBITDA ratio trends towards 2x; (3) retained cash flow (RCF)/debt ratio remains above 20%; and (4) the company maintaining strong liquidity profile underpinned by positive free cash flow, all on a sustained basis.

What Could Change the Rating Down

Downward ratings pressure could occur if (1) Moody's adjusted debt/EBITDA rises above 3x on a sustained basis; (2) retained cash flow (RCF)/debt ratio decline to below 15%; (3) free cash flow remains negative over several years and the company loses its headroom under its revolving credit facility financial covenant.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Chemical Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Orion, whose Luxembourg based parent company is publicly listed on the NY Stock Exchange (ticker 'OEC'), is the third-largest global producer of rubber carbon black by capacity and the largest global producer of specialty carbon black by both volumes and revenue. In 2017 the company reported revenue of $1.3 billion and an EBITDA as adjusted by the company of $255 million. The company has 14 plants (including joint ventures) across Europe, North and South America, South Africa and Asia, including a plant in China acquired from Evonik Industries AG ('Evonik', Baa1 stable).

Orion was formed on 29 July 2011, following the leveraged buyout of the carbon black operations from Evonik. Since December 2017 the company is fully floated on the NYSE and its market capitalization was of around $1.6 billion at the end of March 2017.

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.

Hubert Allemani
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke N Richter, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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