Research Update: France-Based Albea Beauty Holdings 'B' Rating Affirmed, Proposed Debt Rated 'B'; Outlook Primary Credit Analyst: Varvara Nikanorava, London (44) 20-7176-3988; varvara.nikanorava@spglobal.com Secondary Contact: Terence O Smiyan, London (44) 20-7176-6304; terence.smiyan@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Recovery Analysis Related Criteria Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 1
Research Update: France-Based Albea Beauty Holdings 'B' Rating Affirmed, Proposed Debt Rated 'B'; Outlook Overview Cosmetics packaging company Albea Beauty Holdings S.A. intends to issue a new $816 million-equivalent term loan B to refinance its existing 245 million senior secured notes and $385 million senior secured notes, and to pay a dividend to its shareholders. We expect the transaction to lead to an increase in absolute debt but have a positive effect on Albea's interest cover and strengthen its liquidity. We are affirming our 'B' long-term corporate credit rating on the company. We are also assigning our 'B' issue rating to the proposed term loan B. The stable outlook reflects our expectation that Albea's improving operating performance and financial policies will allow the company to maintain credit metrics commensurate with our 'B' rating in the near term, while liquidity remains adequate. Rating Action On March 27, 2017, S&P Global Ratings affirmed its 'B' long-term corporate credit rating on France-based cosmetics packaging company Albea Beauty Holdings S.A. The outlook is stable. At the same time, we assigned our 'B' issue rating to the proposed $816 million term loan B with a recovery rating of '4', reflecting our expectation of average (30%-50%; rounded estimate: 45%) recovery in the event of a payment default. Rationale The affirmation reflects our expectation that the proposed transaction will be largely neutral to the credit quality of Albea, leading to higher absolute debt which is partially offset by improved interest coverage ratios. The refinancing transaction will also eliminate medium-term refinancing risks by pushing Albea's nearest debt maturity to 2024, compared with its existing capital structure where both sets of notes-- 245 million senior secured notes and $385 senior secured notes--are due in 2019. As a part of the transaction, the company is paying a $68 million dividend to its owner Sun Capital Inc. We expect pro forma the proposed transaction leverage to slightly increase because Albea's absolute reported debt will increase by about $140 million WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 2
from the reported year-end 2016 of $738 million. However, this will be balanced by a substantially lower expected interest expense which should boost the funds from operations (FFO) interest cover from about 2x to an expected 3x in 2017. We also forecast that the FFO-to-debt ratio will improve toward 10% from mid-to-high single-digit levels in 2015-2016. We also view positively Albea's intention to put in place a $105 million revolving credit facility (RCF) which will enhance the company's liquidity position and provide flexibility for growth. We understand that Albea will retain its 100 million European factoring facility and its $60 North American asset-based lending (ABL) facility for working capital management purposes. Our assessment of Albea's fair business risk profile is constrained by the company's exposure to what we view as more cyclical end markets, where spending is somewhat discretionary compared to some other rated peers in the packaging portfolio who cater, for example, to pharma or food and beverage industries. Our assessment also takes into account the company's relatively high customer concentration compared with other packaging companies--with the top-10 customers accounting for more than half of its revenues--and what we view as below-industry-average profitability, with recent EBITDA margins close to 12%. Partly mitigating these constraints are the company's broad geographical reach and strong market positions, especially in higher-growth emerging markets. The beauty and cosmetics packaging market has higher barriers to entry than some other packaging sectors (such as plastic film packaging) as industry expertise and innovative production are supported by ongoing research and development efforts. Beauty packaging remains an integral part of the end product, especially for high-end products where Albea has established expertise, and is a key part of the customer purchasing decision and therefore the company's marketing efforts. Albea benefits from long-standing relationships with blue chip customers such as L'Oréal, Estée Lauder, LVMH, and Procter & Gamble, and has a high customer retention rate. Its ability to pass on volatile raw material costs to customers, paired with its presence in a market with higher barriers to entry than other packaging industries, further supports the ratings. After Albea acquired the cosmetics business from Rexam in 2012, a lot of work has been done to integrate the business and rationalize its manufacturing spread. The company retained a good grasp over its working capital and a balanced growth path, in our view. Going forward, we think restructuring costs will decrease over the medium term, resulting in gradually improving profitability, cash flow generation, and credit metrics as a result. In our base case for 2017, we assume: Single-digit revenue growth; Profitability improvement resulting in the reported EBITDA margin increasing toward 13% (compared with about 12% for 2016); Capital expenditure (capex) of about $75 million; and No major acquisitions or shareholder distribution. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 3
Based on these assumptions, we arrive at the following credit measures: FFO to debt of about 10% (compared with about 8% for 2016); and FFO cash interest cover of about 3x (compared with about 2x for 2016). Liquidity We assess Albea's liquidity position as adequate, based on our expectation that sources will exceed its uses by more than 1.2x over the next 12 months. The liquidity position is supported by a long-dated maturity profile and the absence of financial maintenance covenants after the refinancing and the new RCF. We estimate that principal liquidity sources over the next 12 months from January 2017, pro forma the transaction, will comprise: Cash balances of about $85 million as of end-december 2017; Full $105 million availability under the new RCF in 2023; Full availability under its $60 million North American ABL facility and 100 million European factoring facility, both available until 2019; About $3 million of asset sale proceeds; Forecast cash FFO of about $85 million-$95 million; and The issuance of the new $816 million term loan B. We estimate that principal liquidity uses over the same period will comprise: Annual capex of about $75 million; Intrayear peak working capital requirements of about $20 million; Immaterial term loan B U.S. dollar-tranche amortization payments; Approximately $60 million in transaction fees and call premium; The redemption of the existing senior secured notes and repayment of drawings under its ABL and factoring lines including accrued interest of about $690 million; and A dividend to the shareholder of about $68 million. We understand that the new financing will not have any maintenance covenants. Only the new RCF will include a springing covenant which will be tested when drawn at 40% of the limit. Outlook The stable outlook reflects our expectation that Albea's improving operating performance and financial policies will allow it to maintain credit metrics commensurate with our 'B' rating in the near term, while liquidity remains adequate. We anticipate that the company's leverage ratio will stabilize at about 6x, with FFO to debt improving toward 10% over the next 12 months. Upside scenario A positive rating action would likely depend on a sustainable improvement in the company's financial performance above our expectations for the current ratings, such as an adjusted FFO-to-debt ratio of about 12% and adjusted debt WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 4
to EBITDA of about 5x. These ratios, in conjunction with a financial policy that supports such levels on a sustainable basis, could trigger an upgrade. However, we consider such a scenario remote at this stage due to the company's current shareholder structure. Downside scenario We could lower the ratings if Albea's operating performance weakened materially due to significant input-cost inflation or weak volume growth, resulting in weakening credit metrics such as FFO cash interest cover of below 1.5x. We could consider a downgrade if liquidity becomes tighter than we currently anticipate, leading us to revise our assessment to weak. This could result from integration cost overruns or unexpected working capital constraints. A substantial return to shareholders or substantial acquisitions could also trigger a downgrade. Ratings Score Snapshot Corporate Credit Rating: B//-- Business risk: Fair Country risk: Low Industry risk: Intermediate Competitive position: Fair Financial risk: Highly leveraged Cash flow/leverage: Highly leveraged Anchor: b Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Financial policy: FS-6 (no additional impact) Liquidity: Adequate (no impact) Management and governance: Fair (no impact) Comparable rating analysis: Neutral (no impact) Recovery Analysis Key analytical factors The issue rating on Albea's proposed senior secured $816 million term loan B is 'B', in line with the corporate credit rating. The recovery rating is '4', indicating our expectation of average recovery (30%-50%, rounded estimate 45%) in the event of a payment default. This is supported by our going concern assumption and the senior secured ranking of these facilities, but constrained by the existence of some prior-ranking liabilities (such as ABL and factoring facilities and local WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 5
working capital lending). We expect that the proceeds of the new term loan will be used to refinance the existing $385 million and 245 million senior secured notes due 2019, and pay a $68 million exceptional dividend to shareholders. Our view of the security package provided to senior secured lenders is relatively weak as it comprises only share pledges, pledges over intercompany receivables, and bank accounts. In the U.S., lenders will receive security over all assets except those pledged for the benefit of ABL lenders. We also note the limitation of the facilities' guarantee package, as certain jurisdictions will be excluded from the guarantor coverage test. The documentation is covenant lite, there will be a senior secured leverage ratio tested only if at least 40% of revolving commitments are drawn. The documentation would also permit the issuance of an incremental facility up to $130 million or 75% of consolidated EBITDA, and other alternative senior secured debt provided that the senior secured leverage ratio does not exceed 4.60x (closing leverage). We also highlight the presence of a portability clause, which would permit a change of control subject to certain conditions. Our hypothetical default scenario would likely be triggered by a combination of falling revenues, owing to intensified competition and slowing demand in challenging European markets and China, as well as margin pressure caused by inflation in raw material costs. We value the company as a going concern, given its leading market position in the niche beauty and cosmetics packaging market--which has relatively high barriers to entry--and its long-standing relationship with blue chip customers. Simulated default assumptions Year of default: 2020 Jurisdiction: France Simplified waterfall Emergence EBITDA: $120 million (minimum capex at 3% of sales, representing our estimate of the amount of capex that the company would need to spend, at minimum, in a default scenario; cyclicality adjustment of 5% is standard for the containers and packaging industry; no operational adjustment was used) Multiple: 5.0x (in line with the industry-average multiple) Gross enterprise value at emergence: $599 million Net enterprise value after administrative expenses (5%): $569 million Priority liabilities (ABL facility, factoring, and local lending): $137 million* Estimated senior secured debt claims: $926 million* Recovery expectation: 30%-50% (rounded estimate 45%) *Includes six months' prepetition interest. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 6
Related Criteria Criteria - Corporates - General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 07, 2016 Criteria - Corporates - Recovery: Methodology: Jurisdiction Ranking Assessments, Jan. 20, 2016 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 Criteria - Corporates - Industrials: Key Credit Factors For The Containers And Packaging Industry, Nov. 19, 2013 General Criteria: Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 07, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Ratings List Ratings Affirmed Albea Beauty Holdings S.A. Corporate Credit Rating B//-- Senior Secured B Recovery Rating 4(45%) New Rating Albea Beauty Holdings S.A. Senior Secured B Recovery Rating 4(45%) Additional Contact: Industrial Ratings Europe; Corporate_Admin_London@spglobal.com Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 7
to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT MARCH 27, 2017 8
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