The rating on Albea reflects our assessment of the group's financial risk profile as "aggressive" and business risk profile as "fair" (post acquisition).
Our assessment of Albea's financial risk profile as "aggressive" reflects our view of the group's capital structure following the completion of the acquisition. Albea is owned by private-equity firm Sun Capital Inc., and we assess Albea's financial policy as "aggressive." The ratings are further constrained by limited audited historical financial data and a still-nascent track record. We forecast that Albea's Standard & Poor's-adjusted debt-to-EBITDA ratio will be just less than 4.5x at Dec. 31, 2013.
Our assessment of Albea's business risk profile as "fair" reflects the newly combined group's position as a global leader in the niche beauty and cosmetics packaging market, with combined sales about $1.5 billion in 2013. The combined group is likely to benefit from economies of scale, an enhanced product portfolio, and stronger market positions, (especially in higher-growth emerging markets, which we understand will represent 30% of total sales). The group benefits from long-standing relationships with blue-chip customers such as L'Oreal and Estee Lauder. It has improved its ability to pass on volatile raw material costs to customers--almost three-quarters of Albea's sales contracts included price-adjustment clauses in 2011.
The beauty and cosmetics packaging market has higher barriers to entry than some packaging industries (such as plastic film packaging), because industry expertise and innovative production is supported by ongoing research and development efforts. Beauty packaging remains an integral part of the end product, and is a key part of the customer purchasing decision and therefore marketing efforts.
These strengths are somewhat offset by the weak macroeconomic outlook in key European markets, which represent about 50% of combined group sales, and exposure to more cyclical end markets where spending is somewhat discretionary in nature. Further constraining the rating are weak, if improving, EBITDA margins versus peers. (We calculate an adjusted EBITDA margin of 8.4% for the 12 months to June 30, 2012, for Albea on a stand-alone basis.) The group also suffers from some customer concentration--its top 10 customers account for more than one-half its sales.
We view Albea's liquidity as "adequate" under our criteria. We anticipate that liquidity sources will exceed liquidity uses by about 2x in 2013. During this 12-month period, our forecast liquidity sources comprise:
-- Cash on balance sheet of about $140 million; and
-- Funds from operations (FFO) of about $75 million.
We estimate that Albea's liquidity uses for the 12-month period will include:
-- Capital spending of over $100 million; and
-- A modest working capital outflow.
Albea's up to EUR100 million European factoring facility and up to $60 million North American asset-based lending facility support liquidity. These facilities are subject to certain borrowing base limitations; as of June 30, 2012, $88 million was available under the European factoring facility and $48 million under the North American asset-based lending facility. The group has a degree of flexibility in curbing capital expenditure, which in turn could become a potential source of additional liquidity.
The group's liquidity position also benefits from its long-term debt maturity profile.
The issue rating on the senior secured note issues of EUR200 million (due 2019) and $385 million (also due 2019) issued by Albea Beauty is 'B+', in line with the corporate credit rating. The recovery rating is '4', indicating our expectation of average (30%-50%) recovery in the event of a payment default.
The recovery rating is supported by our view of Albea's valuation as a going concern, its leading market position, and the synergies expected to be achieved through the acquisition of Rexam PLC (BBB-/Stable/A-3). The recovery rating on the proposed notes is constrained at '4' by:
-- The existence of material prior-ranking debt in the group's capital structure;
-- The limitation of the notes' guarantee and security package;
-- The existence of a material debt allowance in the notes' documentation; and
-- France's relatively unfavorable jurisdiction for creditors.
The notes are contractually subordinated to the working capital assets pledged to the $60 million North American Asset-Based Lending (ABL) and the EUR100 million European factoring facilities. They are also structurally subordinated to debt raised at operating subsidiaries (currently about $16 million is available at subsidiaries).
The notes' guarantee and security package have some important limitations, as they exclude the contributions from French operating subsidiaries--these account for 33% of combined group sales and 22% of its EBITDA. As such, the proposed guarantee package as of the 12 months to June 30, 2012, only comprises Twist Beauty Packaging S.a.r.l. (Luxembourg) and material subsidiaries, which are expected to represent 47%, 53%, and 55% of the combined group's revenue, EBITDA and net assets, respectively. This is a relatively low coverage level by market standards.
The collateral package, which comprises most of the guarantors' tangible and intangibles assets, also fails to capture French assets. The notes' documentation provides partial protection regarding Albea Beauty's ability to incur or guarantee additional indebtedness. An incurrence fixed-charge coverage ratio of at least 2.0x (on a pro forma basis) must be maintained if the group incurs additional unsecured debt.
However, on a pro forma basis Albea would be able to assume significant additional indebtedness (about $300 million). Secured debt will also be subject to an incurrence consolidated senior secured leverage test of maximum 3.75x (on a pro forma basis), which would leave no headroom for additional senior secured debt at this stage. In addition, there is no hard cap regarding Albea Beauty's ability to raise a qualified securitization facility.
In line with our criteria, to calculate potential recoveries, we simulate a hypothetical default scenario. Under this scenario, a default would occur following a combination of top-line deflation, due to intensified competition and slowing demand from challenging European markets; margin pressure, caused by inflation in raw material costs and delays in synergies from Rexam integration; and an increase in variable interest rates. This scenario would lead to a default in 2015 due to the group's incapacity to service interest, with EBITDA declining to $117 million at the point of hypothetical default.
We envisage a stressed enterprise value of about $585 million at the point of hypothetical default, which is equivalent to 5x the stressed EBITDA multiple. After deducting priority liabilities, mainly comprising enforcement costs, 50% of the unfunded pensions deficit, and finance leases, we arrive at a net enterprise value of about $494 million. We envisage $222 million first-lien debt, including a fully drawn North American ABL, the European factoring facility, local lending facilities at subsidiary level, and six months prepetition interest. This would leave about $272 million residual value available for the proposed $650 million senior secured notes, resulting in average (30%-50%) recovery prospects for noteholders.
The stable outlook reflects our opinion that Albea has the capacity to reduce its debt leverage steadily over the medium term through an improved operating performance and robust cash generation. We anticipate that, following the acquisition of Rexam, pro forma credit metrics should be at levels commensurate with the 'B+' rating. Specifically, this means adjusted debt-to-EBITDA of less than 5x, and adjusted FFO-to-debt of more than 12% on a pro forma basis.
We could lower the ratings if Albea's operating performance and cash generation do not improve enough to allow the group to deleverage, and credit metrics weaken to levels that we consider are commensurate with a "highly leveraged" financial risk profile.
If Albea materially reduces its debt leverage, we could consider raising the rating.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Methodology And Assumptions On Risks In The Packaging Industry, Dec. 4, 2008
-- Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, April 4, 2006
New Rating; CreditWatch/Outlook Action
From (prelim) To
Albea Beauty Holdings S.A.
Corporate Credit Rating B+/Stable/-- B+/Stable/--
Senior Secured B+ B+
Recovery Rating 4 4
US$385 mil 8.375% nts due 11/01/2019
EUR200 mil 8.75% nts due 11/01/2019