London, 07 December 2012 -- Moody's Investors Service has today downgraded to Caa1 from B3 the corporate family rating (CFR) and probability of default rating (PDR) of Kerling plc. Concurrently, the rating agency has downgraded to Caa1 from B3 the ratings on Kerling's EUR 785 million of senior secured notes maturing in 2017, and EUR 75 million of senior secured loan notes maturing in 2016. The outlook on the ratings is negative.
"In addition to our ongoing negative outlook for Europe's cyclical polyvinyl chloride (PVC) product market, today's rating action also reflects Kerling's inability to improve profitability and to achieve credit metrics that we consider to be appropriate for the B3 rating," says Anthony Hill, a Moody's Vice President--Senior Analyst and lead analyst for Kerling.
Following Kerling's acquisition of Tessenderlo's European vinyl and chloralkali assets in the third-quarter of 2011, the harsh trading environment has continued to overwhelm the company's attempts to restore its credit metrics to appropriate levels. Moody's had previously expected that Kerling would have been able to decrease its leverage to around 5.5x debt/EBITDA on a Moody's-adjusted basis and maintain it at that level through 2013. However, as of the last twelve months (LTM) ending 30 September 2012, this ratio was 8.5x, and Moody's expects it to decrease to only around 7.5x by this fiscal year-end 31 December 2012, after taking into account the full contribution of Tessenderlo's European vinyl and chloralkali assets.
Also taking into account the full contribution of the acquired Tessenderlo's assets, Moody's expects that Kerling will post revenues of around EUR 3.0 billion at fiscal year-end 31 December 2012, which will represent around a 26% increase in revenues from fiscal year 2011 to 2012. However, the rating agency expects that adjusted EBITDA will decline by nearly 8.5% over the same period (EUR 191 million in 2011 compared with about EUR 175 million now expected for 2012). This significant reduction in profitability reflects the depressed demand for PVC in Europe, ongoing customer de-stocking, and the company's inability to adequately pass-through ethylene cost increases. Against this backdrop Moody's does not expect a material near-term decrease in the company's financial leverage.
Kerling's ratings reflect the company's (1) high adjusted financial leverage and low adjusted financial interest expense coverage; (2) limited product diversification and its exclusive European footprint and focus, confirmed by its acquisition of Tessenderlo's European vinyl and chloralkali assets. Nearly 90% of Kerling's sales are based in Europe, leaving the company highly exposed to the downside risks associated with the euro area sovereign crisis and slow economic growth.
More positively, Kerling's ratings continue to receive support from the company's backward integration into ethylene and its feedstock agreements with strategic suppliers and partners, including Ineos Group Holdings SA (B2 positive).
As of 30 September 2012, Kerling reported a EUR 77 million cash balance and approximately EUR 60 million in availability under its EUR 200 million securitisation facility. The company also reported an undrawn revolving credit facility (RCF) of EUR 40 million. Under Moody's base-case assumptions for profitability, maintenance capital expenditures and working capital movements in 2013, the rating agency projects that Kerling will not generate positive free cash flow. Despite Kerling's current cash level, Moody's ultimately views the company's liquidity profile as weak due to (1) ongoing pressure on profitability and cash generation; (2) shrinking availability under the company's securitisation facility; and (3) uncertainty about its ongoing ability to draw under the RCF.
The negative outlook reflects our concerns that Kerling's operational and financial performance will increasingly come under pressure in the coming quarters due to persisting weakness in its core European PVC market, which remains affected by structural overcapacity, given limited prospects for recovery in construction end-user markets, especially in Southern Europe. As a result, the outlook assumes that over the coming quarters the weakening trends in credit metrics will continue, with no major catalyst currently envisaged for a possible reversal of this trend in the near future.
WHAT COULD CHANGE THE RATINGS UP/DOWN
Whilst Moody's does not anticipate positive rating pressure in the near term, this could occur in the event of a sustained improvement in the PVC market in Europe, as well as an improved EBITDA margin above 9%, stronger cash flow generation and a reversal in the leverage trend, with Moody's-adjusted debt/EBITDA declining to below 5.5x on a sustainable basis.
Moody's would consider downgrading the Caa1 ratings if there is continued deterioration in Kerling's operating performance from current levels, leading to (1) materially lower profitability on a sustained basis; (2) negative FCF generation and a weaker liquidity position; or (3) a Moody's-adjusted debt/EBITDA increasing to above 7.5x on a sustained basis.
Kerling is a leading PVC and caustic soda producer in Europe, with additional positions in salt, brine and sulphur chemicals. It was formed by Ineos Capital through a combination of the Hydro ASA polymers business acquired in 2009, Ineos Enterprises and Ineos ChlorVinyls. At the end of 2011, Kerling reported an audited consolidated turnover of approximately EUR 2.4 billion and EBITDA of EUR 193 million.
The principal methodology used in rating Kerling Plc was the Global Chemical Industry Methodology published in December 2009. 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 these methodologies.
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