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France-Based Packaging Company
Albea Beauty Holdings 'B' Ratings
Affirmed On Improved Liquidity
Profile; Outlook Stable
Primary Credit Analyst:
Varvara Nikanorava, London (44) 20-7176-3988; email@example.com
Terence O Smiyan, London (44) 20-7176-6304; firstname.lastname@example.org
Tuomas E Ekholm, CFA, Frankfurt (49) 69-33-999-123; email@example.com Thibaud Lagache, Paris +33 1 44 20 67 89; firstname.lastname@example.org Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Recovery Analysis Related Criteria And Research Ratings List WWW.STANDARDANDPOORS.COM/RATINGSDIRECT OCTOBER 8, 2015 1 1461861 | 300941949
France-Based Packaging Company Albea Beauty Holdings 'B' Ratings Affirmed On Improved Liquidity Profile; Outlook Stable Overview
• The management of France-based cosmetics packaging company Albea is focusing on cash-preserving measures following soft demand for beauty products.
• As a result, we have revised our liquidity assessment to "adequate" from "less than adequate."
• We are affirming our 'B' long-term corporate credit rating and 'B' issue rating on Albea.
• The stable outlook reflects our view that the company will sustain its EBITDA margin of about 10%, as restructuring costs diminish.
Rating Action On Oct. 8, 2015, Standard & Poor's Ratings Services affirmed its 'B' long-term corporate credit rating on France-based cosmetics and beauty packaging company Albea Beauty Holdings. The outlook is stable.
We also affirmed our 'B' issue rating on Albea's €245 million senior secured notes and its $385 million senior secured notes, both due in 2019. The recovery rating on the €245 million notes and the $385 million senior secured notes is unchanged at '4', indicating our expectation of average (30%-50%) recovery, at the higher end of the range, in the event of a default.
Rationale The affirmation reflects our expectation that Albea will continue to report overall satisfactory performance, including an EBITDA margin of about 10%.
This is in light of soft demand for beauty products in its main markets, namely from the slowdown in Brazil and lower demand in Europe.
Despite a challenging operating environment, Albea improved its liquidity profile in the first half of 2015 by issuing new debt, adjusting capital expenditure (capex) to market growth, and improving working capital management. We view the company's reduction in its planned capex by about 20% as positive, as it has boosted cash flows while maintaining investment in its manufacturing processes efficiency. While Albea's liquidity position has strengthened, we still view the company's financial risk profile as "highly leveraged." It had Standard & Poor's adjusted debt of about $936 million as of June 30, 2015. (As well as senior debt, we include the company's preferred
equity certificates, factoring in utilization, operating leases, and pension obligations, and do not deduct any cash holdings due to the company's private equity ownership. We make our adjustments based on the reported numbers for the most recent interim period where we have a sufficient degree of disclosure. Otherwise, we use the latest full-year financial report numbers.) We think that a number of downside risks remain, such as the difficult operating environment in Europe (representing about 50% of Albea's revenues) and some other markets like Brazil, which could hold back any substantial near-term improvement in credit metrics. We therefore think that Albea's credit ratios are likely to remain in the "highly leveraged" category--with funds from operations (FFO) to debt of below 12%, and debt to EBITDA above 5x in the next 12 months.
We continue to assess Albea's business risk profile as "fair," constrained by the group's exposure to cyclical end markets where spending is somewhat discretionary, as well as its relatively high customer concentration compared with other packaging companies. This results in below-industry-average profitability, with recent EBITDA margins being below 10%. Partly mitigating these constraints is the company's broad geographical reach following the acquisition of Rexam Personal Care PLC in 2013, and its strong market positions, especially in higher-growth emerging markets. The group benefits from long-standing relationships with "blue chip" customers such as L'Oréal, LVMH, Procter & Gamble, and Estée Lauder.
Our base case for 2015 assumes:
• High single-digit revenue declines for 2015 as the company continues to be affected by adverse foreign currency movements and still-sluggish growth in some emerging markets, as well as some uncertainties in Western Europe;
• An EBITDA margin of about 10%;
• Capex of about $75 million-$80 million in 2015 as the company aligns its spending to softer demand; and
• No shareholder distribution or major acquisitions.
Based on these assumptions, we arrive at the following credit measures:
• FFO-to-debt ratio of slightly above 6%; and
• Standard & Poor's-adjusted leverage ratio improving toward 6x in the following two years.
Liquidity We are revising our liquidity assessment to "adequate" as Albea's management continues to undertake cash-preserving measures as overall market demand remains weak. We believe that Albea can cover its liquidity uses by liquidity sources by at least 1.2x over the next 12 months.
We anticipate liquidity sources in the 12 months from June 30, 2015, to be:
• $107 million of cash on the balance sheet as of June 30, 2015;
• Aggregate access to about $50 million, undrawn under the long-term committed €100 million European factoring facility and $60 million North
American asset-based lending (ABL) facility; and
• Our forecast cash FFO generation of about $60 million.
We estimate that Albea's uses of liquidity over the same period will be:
• Short-term debt of $47 million, including amounts drawn under the ABL and factoring lines;
• Capex of about $90 million;
• $10 million for a swing in working capital needs; and
• Some bolt-on acquisitions.
We understand Albea's credit portfolio does not contain financial maintenance covenants.
Outlook The stable outlook on Albea reflects our view that the company will be able to sustain its EBITDA margin of about 10%, as costs tied to the integration of Rexam Personal Care diminish. The stable outlook incorporates our base-case scenario of a FFO-to-debt ratio of above 6% and adjusted debt to EBITDA gradually improving toward 6x.
Downside scenario A potential downgrade of Albea could be triggered by a material weakening of its operating performance, possibly from significant input-cost inflation, weak volume growth, or a substantial deterioration in the group's activities resulting in weakening credit metrics, such as FFO cash interest cover falling below 1.5x. We could also downgrade the company if we forecast a material deficit of liquidity sources over liquidity uses. This could be from integration cost overruns, pressure on working capital, or a lack of anticipated synergies with Rexam.
Upside scenario We are unlikely to upgrade Albea over the coming 12 months because we expect limited leverage reduction. Any rating upside would depend on a sustained improvement in Albea's financial performance above our current expectations, such as FFO to debt approaching 12% and adjusted debt to EBITDA of 5x. This would be in conjunction with a financial policy that sustainably supports such levels. We consider such a scenario to be remote at this stage, due to the company's current shareholder structure.
Ratings Score Snapshot
Corporate Credit Rating: B/Stable/-Business risk:
• 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)
• Liquidity: Adequate (no impact)
• Financial policy: FS-6 (no additional impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Neutral (no impact) Recovery Analysis Key analytical factors
• The issue rating on Albea's senior secured notes is 'B' with a recovery rating of '4'. This reflects their senior secured position in the group's capital structure and is constrained by the existence of significant prior-ranking liabilities. The rating also reflects the limitation of the note's guarantee and security package (subsidiaries accounting for about 40% of the company's EBITDA are nonguarantors) and the existence of a material debt allowance under the notes' documentation.
• Our hypothetical scenario contemplates a default in 2018, which would likely be triggered by a combination of falling revenues, owing to intensified competition and slowing demand in challenging European markets and China; margin pressure caused by inflation in raw material costs; and delays in synergies from the Rexam integration.
• 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: 2018
• EBITDA at default: about $117 million
• Implied enterprise value multiple: 5x
• Jurisdiction: France Simplified waterfall
• Gross enterprise value at default: about $584 million
• Administrative costs: $41 million
• Net value available to creditors: $543 million
• Priority liabilities (1): about $264 million
• Senior secured debt claims (2): about $688 million
• Recovery expectation: 30%-50% (higher half of the range)
(1) Includes 50% of pension deficit, finance leases, $60 million North American ABL facility and €100 million European receivables facility, both assumed to be 80% drawn at default.
(2) All debt amounts include six months' prepetition interest.
Related Criteria And Research Related Criteria
• Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• Revised Revolver Usage Assumptions For Recovery Analysis In Corporate Ratings, Nov. 20, 2014
• The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014
• Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Methodology: Industry Risk, Nov. 19, 2013
• Key Credit Factors For The Containers And Packaging Industry, Nov. 19,
• Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013
• Corporate Methodology, Nov. 19, 2013
• Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012
• Use Of CreditWatch And Outlooks, Sept. 14, 2009
• Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
• Update: Jurisdiction-Specific Adjustments To Recovery And Issue Ratings, June 20, 2008
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