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April 14 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned France-based SGD Group SAS (SGD Pharma) an expected Long-term Issuer Default Rating (IDR) of ‘B(EXP)’ with Stable Outlook. Fitch has concurrently assigned the group’s upcoming issue of EUR335m senior secured notes an expected ‘B(EXP)’ rating.
The assignment of the final ratings is contingent on the receipt of final documents conforming to information already received. Failure to refinance the existing debt with the proposed notes issue according to plan would result in the withdrawal of the ratings.
The ratings are based solely on the pharma business of SGD Group and exclude the perfumery business, which is being demerged from the group, with expected completion by end-2015. The ratings are also based on our assumption that the legal separation of the pharma and perfumery businesses will mostly be completed at the time of the notes issue, that SGD Pharma will continue to pay for the operational costs of the perfumery business until separation is complete and that the shareholder, Oaktree Capital, will provide credit support for any indemnity.
The ratings reflect SGD Pharma’s limited scale of its operations and fairly high funds from operations (FFO) adjusted leverage, which we forecast to remain at around 5.5x. However, the group’s credit profile is supported by leading positions in the stable pharma glass packaging market, high barriers to entry and limited end-market and customer concentration.
Leverage is high, but adequate for the ratings. FCF generation over the next two years will be limited by large investment outlays of EUR75m. We expect the group to be FCF positive from 2016, when it completes the separation of its perfumery and pharma operations and capex returns to normalised levels.
Sound Business Profile
SGD Pharma’s business profile is commensurate with the ‘B’ rating category. The limited scale of its operations and focus on the pharmaceutical glass market are mitigated by a range of therapeutic end-markets served by its products. In addition, customer concentration is limited, eliminating dependency on the success of single drugs, formats or customers.
The molded glass packaging market has been growing at healthy rates of around 4% since the 2009 recession. We expect long-term favourable demand growth for pharma packaging, driven by global growth in population, life expectancy, chronic diseases and fast-growing demand for healthcare and pharma in emerging markets.
Strong Market Positions
SGD Pharma has strong market positions, particularly in the profitable type I glass market, where it holds a 30% global share. The market for this type of glass is highly concentrated, with the top three players supplying 80% of the market. In its core western European markets (63% of revenues), the group is the undisputed leader in type II and III glass markets with a 55% and 33% share, respectively.
High Barriers to Entry
The group’s profitability is protected in the short- to medium-term by high entry barriers provided by its technological leadership, the large investments required to set up new production and high switching costs for customers, including high regulatory requirements and the reputational risks associated with product quality issues. For SGD Pharma’s customers, switching suppliers is therefore often not economical, given that the price of packaging is small compared with the price of the final product. It amounts to up to 3% for type I glass and up to 5% for type II glass.
Refurbished Asset Base
The group’s assets benefit from large historical investments. This will enable the group to reduce maintenance capex for a number of years, particularly during the construction of its new French plant and the operational separation of its pharma and perfumery businesses, which is capital-intensive.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO adjusted leverage below 4.0x
- Positive FCF generation through the cycle
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO adjusted leverage above 6.0x
- Quality issues, operational disruptions or growing competitive pressure in type II or III markets, resulting in EBITDA margin in the teens
- Liquidity pressures from negative FCF or covenant breaches
SGD Pharma’s liquidity is adequate, given around EUR10m intra-year working capital swings. Post transaction, it will benefit from liquidity of EUR40m, consisting of a EUR35m revolving credit facility and EUR7m in cash, with no debt maturity until 2019, when the new bond matures.