Approximately EUR203 million of rated debt affected
London, 08 November 2012 -- Moody's Investors Service has today affirmed the B1 corporate family rating (CFR) and probability of default rating (PDR) as well as the B3 rating on the EUR203 million senior unsecured notes due 2018 of ALBA Group plc & Co. KG ("ALBA Group"), a holding company for a group focused on waste management, recycling and environmental services. Concurrently, Moody's has changed the outlook on all the ratings to negative from stable.
The affirmation of the ALBA Group's ratings follows the company's announcement that it has completed the refinancing of its senior secured bank loan facilities due in December 2013. The new EUR400 million of bank loan facilities, which have a final maturity in October 2017, benefit from a similar security package as the previous loans and as such do not alter the capital structure of the group. Indeed, the loans improve the group's liquidity profile and reduce refinancing risk in the medium term.
The change in rating outlook to negative reflects ALBA Group's still high debt levels in the more challenging economic environment and the low visibility with regard to the timing of any future recovery in the commodity markets. While Moody's acknowledges the measures ALBA Group has taken to improve the efficiency of its operations, the rating agency believes there is a risk that demand for collection and processing of waste is likely to remain weak over the medium term and that the commodity markets will remain subdued. Consequently, ALBA Group has not been able to deleverage to the extent previously envisaged and may be challenged to do so in the future to the extent that the group's financial profile may remain at a level inconsistent with guidance for the B1 CFR, including de-leveraging to below 4.5x on a debt/EBITDA (Moody's adjusted) basis in the short term.
In H1 2012, ALBA Group reported EBITDA of EUR87 million, which represented a decline of 7% on a consolidated basis compared with the same period of the previous year. The deterioration in the group's earnings was driven by weak demand and declining prices as a result of the more challenging economic environment. ALBA Group's waste operations and trading activities reported a decline in EBITDA of 11% as markets became more competitive and margins came under pressure, whilst at the same time the group's operating costs were up as a result of higher fuel prices. A similar reduction in EBITDA was reported by the group's scrap and metals division on the back of the subdued commodity markets and increased pressure on margins. The only division of ALBA Group to report growth in EBITDA was services, owing to the closing of a major unprofitable contract.
Looking ahead, Moody's cautions that demand from industrial customers is likely to remain weak and ALBA Group's margins could be squeezed. At the same time, ALBA Group's trading activities will continue to be exposed to significant volatility in the commodity markets for paper, ferrous and non-ferrous scrap, with both volumes and prices coming under pressure. Consequently, Moody's estimates that ALBA Group's EBITDA for full year 2012 will decline compared with the previous year, thus impeding the process of de-leveraging.
The B1 CFR primarily reflects the competitive nature of the markets in which ALBA Group operates, its limited scale and high financial leverage. ALBA Group's credit quality is further constrained by a structurally low margin, particularly in the case of the group's low-value-added steel and metals trading business, as well as the cyclicality of its key markets. More positively, the rating continues to recognise ALBA Group's long track record of operations and well-established position as a leading regional waste and recycling operator in Germany. The rating also reflects the group's diverse operations across the whole value chain of waste management and recycling activities, which limits its reliance on any particular market or business line.
ALBA Group's current ratings are based on Moody's expectation that the group will maintain adequate liquidity to support its business operations and fund any working capital fluctuations in the volatile commodity markets. Following refinancing of bank debt in October 2012, the group's liquidity is supported by cash on the balance sheet of EUR49 million and a EUR200 million revolving credit facility (of which EUR111 million currently undrawn) with a final maturity in 2017. Amortisation of the term loans is limited, although the rating agency notes that covenant headroom may tighten over time.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the current negative outlook, Moody's does not expect upward rating pressure in the intermediate term. However, the rating agency could change the outlook back to stable if ALBA Group evidences a reduction in debt/ EBITDA in a way that is consistent with the current ratings.
However, downward rating pressure could develop if the group's leverage on a debt/EBITDA basis were above 4.5x for a prolonged time and/or liquidity concerns arise.
ALBA Group's ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside ALBA Group's core industry and believes ALBA Group's ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
ALBA Group plc & Co. KG, headquartered in Berlin, is a holding company for a group focused on waste management, recycling and environmental services. ALBA Group currently owns a 85.324% share in the capital stock of ALBA SE (previously Interseroh SE), a Cologne-based recycling and raw materials trading company, with the remaining 14.676% being publicly held. Axel and Eric Schweitzer, the sons of ALBA Group's founder, each indirectly own 50% of the capital of ALBA Group. The group reported consolidated revenues of EUR3.2 billion for FYE 31 December 2011.
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