TEXT-S&P downgrades Clondalkin Industries to 'B-'
Dec 19 () - Overview -- Netherlands-based packaging group Clondalkin Industries B.V. (Clondalkin) is facing refinancing risk because its EUR300 million and $150 million senior secured floating-rate notes mature in December 2013. -- Absent any refinancing, uses of liquidity will exceed sources in financial 2013. Consequently, we have revised downward our assessment of Clondalkin's liquidity to "weak" from "less than adequate." -- We are therefore lowering our long-term corporate credit rating on Clondalkin to 'B-' from 'B'. -- The negative outlook reflects our view that that we could lower the long-term rating on Clondalkin to 'CCC+' if the group does not refinance its senior secured floating-rate notes at least six months before their maturity date. Rating Action On Dec. 19, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Netherlands-based packaging group Clondalkin Industries B.V. (Clondalkin) to 'B-' from 'B'. The outlook is negative. At the same time, we lowered our issue rating on the senior secured revolving credit facility (RCF) issued by Clondalkin Acquisition B.V. to 'BB-' from 'BB'. The recovery rating on this RCF is unchanged at '1+', indicating our expectation of full recovery in the event of a payment default. In addition, we lowered our issue rating on the EUR300 million and $150 million senior secured floating-rate notes due December 2013, issued by Clondalkin Acquisition, to 'B-' from 'B'. The recovery rating on this debt is unchanged at '3', indicating our expectation of meaningful (50%-70%) recovery in an event of payment default. Finally, we lowered our issue rating on the EUR170 million senior subordinated notes due March 2014, issued by Clondalkin, to 'CCC' from 'CCC+'. The recovery rating on these notes is unchanged at '6', indicating our expectation of negligible (0%-10%) recovery in an event of payment default. Rationale The downgrades reflect our view of the refinancing risk associated with the maturity of Clondalkin's EUR300 million and $150 million senior secured floating-rate notes in December 2013. The downgrades also factor in the downward revision of our assessment of Clondalkin's liquidity to "weak" from "less than adequate," as our criteria define these terms, to reflect that, absent a refinancing, Clondalkin's uses of liquidity will exceed its sources in the financial year ending Dec. 31, 2013. A downgrade is likely should Clondalkin not refinance its EUR300 million and $150 million senior secured notes at least six months before the scheduled maturity date of December 2013. If Clondalkin does not address the refinancing risk in a timely manner, we could lower the long-term corporate credit rating on Clondalkin to 'CCC+'. We factor into our analysis the fact that Clondalkin is considering several refinancing options, including potentially raising funds from disposals. The ratings on Clondalkin reflect our view of the group's "highly leveraged" financial risk profile and "fair" business risk profile. We assess management and governance as "fair" under our criteria. Although weak macroeconomic conditions in Europe and challenging supply chain conditions in North America persist, we forecast low-single-digit revenue growth in the year to Dec. 31, 2012, to more than EUR960 million. Raw material price volatility has put pressure on margins, but the group has a proven ability to pass through costs to its customer base, albeit with a time lag. We therefore anticipate that the group's adjusted EBITDA margin will be just less than 9% in the year to Dec. 31, 2012. Despite the challenging operating environment, Clondalkin remains strongly cash flow generative. We forecast that the group will generate stable funds from operations (FFO) of just less than EUR60 million in financial 2012, with Standard & Poor's-adjusted FFO to debt of just more than 7% (or just more than 11% excluding shareholder loans of EUR301 million with accrued interest). Liquidity We assess Clondalkin's liquidity as "weak" under our criteria. Absent any refinancing, uses of liquidity will significantly exceed sources in financial 2013. This is the main reason behind our downward revision of our liquidity assessment to "weak" from "less than adequate" previously. From an operating perspective, the group continues to benefit from large recurring cash balances and stable cash flow generation. We do not anticipate any acquisitions or dividends. Clondalkin's existing notes and credit facilities do not impose maintenance financial covenants. The main limitation on additional indebtedness is an EBITDA interest coverage ratio of above 2x, based on an incurrence test. We believe that headroom under this covenant is likely to remain adequate over the near to medium term. Clondalkin's main EUR19 million RCF, which expires in 2013, includes no material adverse-effect clause that would prevent Clondalkin from drawing on it if required. Recovery analysis The issue rating on the senior secured EUR19 million RCF issued by Clondalkin Acquisition B.V., a wholly owned subsidiary of Clondalkin, is 'BB-', three notches above the corporate credit rating on the parent. The recovery rating on the RCF is '1+', indicating our expectation of full recovery in the event of a payment default. The issue rating on the EUR300 million and $150 million senior secured floating-rate notes due December 2013, issued by Clondalkin Acquisition, is 'B-', in line with the corporate credit rating on Clondalkin. The recovery rating on this debt is '3', indicating our expectation of meaningful (50%-70%) recovery in an event of payment default. The issue rating on the EUR170 million senior subordinated notes due March 2014 issued by Clondalkin is 'CCC', two notches below the corporate credit rating. The recovery rating on these notes is '6', indicating our expectation of negligible (0%-10%) recovery in an event of payment default. The weak recovery prospects reflect the high level of prior-ranking debt claims under our stressed valuation. The recovery ratings on the RCF and senior secured notes are supported by our valuation of the group as a going concern, these debt instruments' comprehensive security package, and a favorable jurisdiction of The Netherlands. The intercreditor agreement establishes the RCF's priority ranking over the senior secured notes. The recovery rating on the senior subordinated notes reflects their contractual and structural subordination to the group's other debt facilities. To calculate recoveries, we simulate a payment default. Under our simulation, a payment default results from Clondalkin being unable to refinance the senior secured notes due in 2013 in a timely fashion on the back of deteriorating operating performance. We estimate that Clondalkin's EBITDA would be about EUR64 million by the time of our hypothetical default in 2013. Our going-concern valuation envisages a stressed enterprise value of about EUR320 million at the hypothetical point of default, assuming a 5x stressed EBITDA multiple. After deducting priority liabilities of about EUR27 million, primarily comprising enforcement costs and 50% of the group's pensions deficit, we calculate a residual value of about EUR290 million for the super senior RCF. We assume that the RCF is fully drawn at default, resulting in our expectation of full recovery (100%) for the RCF debtholders. We further assume about EUR435 million of secured debt outstanding at default, comprising outstanding senior secured floating-rate notes and six months of prepetition interest. This results in our expectation of meaningful (50%-70%) recovery for the senior secured notes in the event of a payment default, which equates to a recovery rating of '3'. The residual value results in negligible (0%-10%) recovery prospects for the EUR177 million of subordinated notes outstanding, including six months of prepetition interest. This equates to a recovery rating of '6' on the subordinated notes. Outlook The negative outlook primarily reflects the possibility that we could lower the long-term rating on Clondalkin to 'CCC+' if the group does not refinance its senior secured floating-rate notes at least six months before their maturity date. There is also a possibility of a downgrade if deterioration in the macroeconomic and financial environments in Western Europe and North America significantly weakens Clondalkin's operating performance beyond our base-case forecast. Such a weakening would entail a sustained deterioration in the group's credit metrics. The current rating and negative outlook are driven by liquidity concerns. We could revise our outlook to stable if the group were to successfully refinance its senior secured notes, and if it continues to sustain operating performance in line with our base-case projections. If Clondalkin were to complete a substantial refinancing, we would likely reassess our long-term corporate credit rating on the group. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. -- Key Credit Factors: Global Criteria for Rating Companies In The Service Sectors, Nov. 12, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008 Ratings List Downgraded To From Clondalkin Industries B.V. Corporate Credit Rating B-/Negative/-- B/Negative/-- Subordinated Debt CCC CCC+ Recovery Rating 6 6 Clondalkin Acquisition B.V. Senior Secured Debt* B- B Recovery Rating 3 3 Senior Secured Debt* BB- BB Recovery Rating 1+ 1+ *Guaranteed by Clondalkin Industries B.V. Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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