TEXT-S&P downgrades Clondalkin Industries to 'B-'

Wed Dec 19, 2012 11:28am EST

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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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