Aug 21 -
Summary analysis -- Rexam PLC ------------------------------------- 21-Aug-2012
CREDIT RATING: BBB-/Stable/A-3 Country: United Kingdom
Primary SIC: Converted paper
Mult. CUSIP6: 76164T
Mult. CUSIP6: 76164U
Mult. CUSIP6: 761655
Credit Rating History:
Local currency Foreign currency
19-Feb-2009 BBB-/A-3 BBB-/A-3
22-Feb-2006 BBB/A-3 BBB/A-3
The ratings on U.K.-based consumer packaging group Rexam PLC reflect Standard & Poor's Ratings Services' view of the group's "satisfactory" business risk profile and "intermediate" financial risk profile.
Rexam's key business strengths include its leading market positions in the relatively recession-resistant, albeit mature and competitive, U.S. and European consumer packaging industries, and its broad geographic footprint. We view the group's profitability as robust, with a Standard & Poor's- adjusted EBITDA margin of about 16% for the rolling 12 months to June 30, 2012.
Relatively weaknesses are Rexam's limited product diversity and high customer concentration, with The Coca-Cola Co. (A+/Positive/A-1) and its affiliated bottlers accounting for a material, albeit reduced, proportion of total revenues.
Our view of Rexam's financial risk profile reflects the group's robust free operating cash flow (FOCF) generation and "adequate" liquidity profile. Rexam's credit metrics have improved following the $360 million sale of its Closures division in September 2011, and its good FOCF generation in recent years. However, there is an element of uncertainty as to whether recently improved credit metrics can be sustained over the medium-to-longer term, which in our view constrains the ratings. In addition, we consider Rexam's cash flow credit measures to be at the lower end of those commensurate with the "intermediate" financial risk profile. We view Rexam's financial policy as moderate, reflecting the group's acquisitive history and shareholder-friendly orientation. For example, Rexam has recently announced the sale of its Personal Care division, and the majority of cash proceeds will be returned to shareholders.
S&P base-case operating scenario
Our base-case scenario assumes that Rexam's like-for-like volumes--excluding the impact of the Personal Care sale, which will reduce sales by about GBP500 million per year--will increase at a low-single-digit rate on average in the year to Dec 31, 2012. We forecast that Rexam will report an adjusted EBITDA margin of about 16% in 2012, following a fairly resilient performance in the first half of the year despite continued macroeconomic headwinds.
Overall, we forecast modest volume increases in Rexam's core European and South American beverage can markets. We anticipate that Rexam's U.S. beverage can volumes will continue to recover over the next 18 months, as the group expects to fully replace volumes from contracts lost in 2011. We see the longer-term trend of volume decline in the U.S. beverage can market continuing. However, increasing customer preferences for higher-margin specialty cans could offset declining demand for standard soft drink cans.
In our view, cost savings (GBP25 million targeted in 2012) should enable Rexam to maintain its operating margin in 2012, despite considerable cost pressures. These cost pressures include increased aluminum conversion costs in Europe and elevated energy and freight costs worldwide.
We believe Rexam's operating performance has the potential for improvement in 2013. This is because asset utilization should improve as a result of contract recovery in the U.S., and Rexam's exposure to emerging markets could bring further upside. However, macroeconomic uncertainty remains a key downside risk to our forecast.
S&P base-case cash flow and capital-structure scenario
We believe that Rexam should maintain credit metrics commensurate with an "intermediate" financial risk profile in the full year ending Dec. 31, 2012. This is based on management's stated commitment to operate at a lower level of debt in light of macroeconomic uncertainty; further supports are Rexam's generally stable end-market demand and cost pass-through provisions in existing contracts. We forecast adjusted debt to EBITDA of about 2.3x for the full year 2012, and adjusted funds from operations to debt of about 30%. In our view, Rexam's credit metrics are unlikely to improve much further from these levels in the near term, because any excess cash is likely be returned to shareholders or reinvested in the business through acquisitions rather than used to reduce net debt.
The short-term credit rating is 'A-3'. We assess Rexam's liquidity as "adequate" under our criteria, reflecting its committed credit facilities coverage of debt maturities by more than 1.2x over the next 12 months. More than GBP1 billion of Rexam's bonds mature in March and June 2013, which the group plans to partially refinance over the next couple of months. Rexam only needs to refinance a portion of the bonds, as it has almost GBP1.2 billion of undrawn committed credit facilities. Our liquidity assessment also reflects the significant headroom under financial covenants and our view that the group is likely to remain cash flow positive over the near term.
Rexam's liquidity resources as of June 30, 2012, consisted of:
-- Cash on balance sheet of GBP339 million. However, we consider about GBP200 million of this to be required for ongoing operations, leaving surplus cash of GBP139 million.
-- Availability under various committed credit facilities of more than GBP1.2 billion, the majority of which matures in 2016 (GBP50 million matures in December 2012).
-- GBP452 million of cash that the group expects will generated by the sale of the Personal Care division, GBP370 million of which will be returned to shareholders. The group anticipates exceptional restructuring cash costs of about GBP25 million as a result of the sale.
-- Continued positive discretionary cash flow (DCF) generation, as we anticipate in our base-case financial forecast. Rexam generated DCF of more than GBP130 million in 2011.
This compares with significant near-term debt maturities, as detailed above. Capital expenditures represent another significant call on Rexam's cash, and management has publicly stated that it expects to spend GBP250 million in the full year 2012. Such expenditures include capacity expansion in Finland, Brazil, India, and Austria, although we note some flexibility in these plans. Other uses of liquidity include increased dividend and pensions payments.
The group's credit facilities include financial covenants, with which it is likely to remain in compliance, in our view. These covenants cover a ratio of net debt to EBITDA of no more than 3.5x and a ratio of EBITA to net interest payable of no less than 2.75x. Net debt is calculated at average exchange rates, which reduces the risk of currency fluctuation.
Rexam's credit facilities include a step-up coupon if the rating on the group falls below investment grade. The interest margin for these facilities also varies depending on the level of the group's ratio of net debt to EBITDA.
The stable outlook reflects our view that Rexam should maintain credit metrics commensurate with an "intermediate" financial risk profile over the near term, despite an uncertain macroeconomic outlook across its key markets, due to stable demand and cost pass-through provisions in its contracts. Furthermore, continued cost savings should enable Rexam to maintain its current level of operating performance in a scenario of low-single-digit volume growth and robust operating margins.
We believe upside rating potential is more likely than rating downside, and could arise from a sustained improvement in credit metrics to a level that aligns more strongly with an "intermediate" financial risk profile over the medium term. In our view, a positive rating action would also depend on evidence of the group's willingness to maintain improved credit metrics through its financial policy and strategy.
We could consider taking a negative rating action if the group demonstrates a more aggressive financial policy. This could arise, for example, if Rexam were to pay a high dividend or complete a material acquisition that increases debt leverage above levels that we view as commensurate with the current ratings.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 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
-- Rexam PLC 60-Year Subordinated Deferrable Bond Rated 'BB+', June 11, 2007