S&P: Packaging Manufacturer Schoeller Allibert Outlook Revised To Positive; Rating Affirmed; Proposed Notes Rated 'B-'
At the same time, we assigned our 'B-' issue-level rating to Schoeller's proposed senior secured notes of €210 million. The recovery rating is '4', indicating our expectation of recovery in the lower half of the 30%-50% range in the event of default.
The outlook revision reflects our view on the positive efforts undertaken by Schoeller's management since the merger between Schoeller Arca Systems and Linpac Allibert. These include the optimization of its manufacturing footprint, contract extension with its biggest customer, stabilization of its earning base, and--most recently--the current refinancing.
We think the new capital structure extends debt maturities and alleviates certain risks that the previous capital structure posed to the company's liquidity, including sizable maturities in 2018 and stringent maintenance covenants. The new capital structure will be primarily composed of the €210 million notes maturing in 2021 with no financial covenants. This should give Schoeller some room to execute its envisaged growth strategy.
We do not expect any immediate positive effect on the credit metrics as a result of this transaction and still believe that the capital structure will remain highly leveraged with an S&P Global Ratings-adjusted debt-to-EBITDA forecast ratio of about 6x at year-end 2016.
We think, however, that management will continue to execute its growth strategy and expand its product offering (which will require a higher capex outlay) in the challenging overall current organic growth environment. This should translate into a gradually growing EBITDA base and some deleveraging over the medium term.
Our assessment of Schoeller's business risk profile as weak reflects the group's exposure to the fragmented and competitive RTP container markets of Western Europe and the U. S. In our view, the shift toward increased use of pooling services in the industry may put pressure on Schoeller's pricing power. While Schoeller delivers to a variety of end-markets including industrial manufacturing, retail, food and beverage, and agriculture, we note that it derives about 20% of its revenues from a single customer. We understand the relationship is long-standing, but this does pose the risk of Schoeller losing a significant portion of its earnings if it were to lose this customer.
These weaknesses are partly mitigated by Schoeller's leading position in the niche RTP market. In our view, there are some barriers to entry in terms of an RTP provider often being embedded in an end-user's logistics process, which results in some switching costs. This factor is gradually becoming more important due to the rise of pooling in Schoeller's core markets. Schoeller also benefits from the fact that many of its end markets--including food and beverage and retail--exhibit stable and strong growth trends and are generally less cyclical.
Our base-case operating scenario for Schoeller in fiscal 2016 assumes:Revenues of about €545 million;An improvement in the group's S&P Global Ratings-adjusted EBITDA to about €55 million;Capital expenditure (capex) of up to €34 million in fiscal 2016, resulting in weak free operating cash flow as the company plans to invest its cash flows into growth; andNo major acquisitions or divestments. Based on these assumptions, we arrive at the following credit measures: Debt to EBITDA of about 6x; andFunds from operations (FFO) cash interest coverage of more than 2x in the coming few years. The positive outlook reflects that we could raise the rating in the next 12 months if we saw Schoeller continuing the positive momentum in EBITDA and cash flow generation that it recently achieved--despite the somewhat slower organic operating environment, and as it executes its growth plan with discipline.
We might raise the rating by one notch if Schoeller continued to report growing EBITDA generation and positive free operating cash flows leading to a stabilization of its credit metrics. In particular, we would expect EBITDA interest cover to remain above 2x, and S&P Global Ratings-adjusted debt to EBITDA to stabilize at 6x.
We could revise the outlook to stable if we believed that management's actions, including the planned investment into new products, would not translate into steady EBITDA growth, or were taking longer to materialize. Rating pressure may also arise from unanticipated lower growth as a result of slower economic growth, operational disruptions, loss of significant customers, or working capital management challenges.
We are also likely to revise our outlook back to stable if the refinancing transaction did not go ahead.