Fitch Affirms Ball Corp's IDR at 'BB+'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the 'BB+' Issuer Default Rating (IDR) and all outstanding debt ratings of the Ball Corporation (BLL). Fitch also assigns a 'BBB-/RR1' rating to Ball's $3.9 billion secured credit facilities due February 2021. The Rating Outlook is Stable. A full rating list is shown at the end of the press release.
KEY RATING DRIVERS
Leverage High Post-Close, Material Deleveraging Expected by 2017
The rating considers a material increase in Ball's leverage due to debt financing of the planned acquisition of Rexam PLC (Rexam). However, Fitch does anticipate the deleveraging process will proceed at a relatively quicker pace, since regulatory divestitures are greater than initial expectations. Pro forma for the transaction, Fitch expects leverage will be in the lower 4x range at the end of 2016. Ball's leverage, adjusted for debt factoring receivables, was 3.3x for the third quarter 2015 (3Q15). Ball and Rexam's combined free cash flow (FCF) generation should allow the company to rapidly reduce leverage, primarily though debt reduction and the benefits of increased EBITDA generation as synergies materialize. During 2017, leverage should further decline to below 3.5x. Ball has a strong track record for deleveraging following large transactions, which is an important rating consideration.
Improved Business Risk Profile
Fitch believes the proposed cash and stock transaction which values Rexam at $8.4 billion will allow Ball to materially improve its business risk profile, profitability and financial flexibility owing to the combined capabilities, production efficiencies and scale of these No. 1 and 2 global beverage-can manufacturers. Thus, the combination should improve Ball's options for better optimizing beverage-can prices to customers relative to other alternative packaging substrates. The transaction also provides access to additional geographies and new customers that will increase Ball's exposure to growing beverage segments, along with the ability to better leverage specialty package technology and streamline plant efficiencies.
Closing Expected in 1H16
Expected to close in 1H16, the transaction is subject to approval from Rexam shareholders, U.S. regulatory authorities and to other customary closing conditions. Ball's shareholders approved the transaction in July 2015. Given the substantial market concentration of the two companies across the U.S., Europe and South America, the regulatory process has been much longer than normal. As of November 2015, Ball had estimated required divestitures of assets producing revenues of at least $2.5 billion annually. Ball has received conditional regulatory approval from regulatory agencies in Brazil and Europe. Brazilian regulators are requiring divestiture of two Ball plants in Brazil. In Europe, regulators are requiring divestiture of two Rexam can plants, 10 Ball can plants and two Ball plants making can ends. Total can manufacturing capacity divested in Europe will be in excess of 18 billion cans.
Expected Net Synergies of Combined Company Meaningful
Prior to divestitures, the combined company had an estimated $14.5 billion in revenues and $1.9 billion in EBITDA for 2015. Based on the offer announcement from November 2015, net synergy benefits were expected to exceed $300 million on an annual basis and non-recurring integration costs were estimated at approximately $300 million over the first three years. Integration efforts should benefit from asset divestitures in Europe and Brazil that are primarily Ball assets versus a mix of Ball and Rexam can plants. Based on synergy realization, Fitch expects operating EBITDA margin improvement, adjusted for expected restructuring costs, of at least 200 basis points (bp) by 2017 and 300 bp by 2018.
Ball Corp's ratings reflect its diversified sources of cash flow, stable credit metrics and leading market positions in the majority of its product categories and market segments. Longer-term expectations are for modestly increasing global beverage-can volume driven by growth in emerging and developing market regions, which have experienced recent slowdowns and volatility along with pricing pressures, primarily in China. Ball has continued taking steps to optimize can mix through investments and removed fixed costs to increase productivity given the maturity and declining 12oz can volumes in its developed markets.
Higher margin, specialty can growth has helped offset 12oz can volume losses associated with declining consumer soft drink (CSD) consumption and stagnating mainstream beer demand. Globally, specialty cans have grown substantially for Ball during the past five years with overall specialty can mix of approximately 30% in 2015 compared with 13% in 2010. Ball should experience operating momentum improvement throughout 2016, except for China, as start-up costs dissipate, new can capacity ramps, the Food and Household segment improves, and expected tailwind benefits from aluminum premiums are realized.
No Near-term Maturities
Ball's nearest term maturity, excluding the securitization program, revolver debt and uncommitted lines of credit, are the senior notes due in 2020. In March 2015, Ball redeemed $1 billion of senior notes including $500 million due in 2020 and $500 million due in 2021 by drawing on the $3 billion revolving credit facility (RCF). In June 2015, Ball issued $1 billion that was used to pay down the RCF and reduced the outstanding RCF commitment by $750 million. In December 2015, Ball issued a three-tranche EUR1.5 billion senior notes offering of U.S.-dollar and Euro-denominated notes to prefund the Rexam acquisition.
Increased Use of Factoring Receivables
Ball has increased the use of factoring receivables during the past year with adjusted days sales outstanding increasing to 65 days as of Sept. 30, 2015 from 48 days a year earlier. Total receivables increased to $1.5 billion from $1.2 billion at the end of 2014. To manage the higher level of receivables, Ball has entered into committed and uncommitted accounts receivable factoring programs with multiple financial institutions for certain company receivables. The combined limits of the factoring program were $605 million at Sept. 30, 2015. A total of $490 million and $198 million were sold under these programs as of Sept. 30, 2015 and Dec. 31, 2014, respectively.
The increased use of receivables factoring is likely due to pressure from key customers trying to optimize their working capital requirements. Ball's program is accounted for as a true sale of the receivables without recourse to Ball. However, Fitch views the practice of receivables factoring as a form of debt, recognizing the core ongoing nature of Ball's receivables and the potential for any required replacement funding being on balance sheet. Therefore, as part of Fitch adjustments, FCF has been reduced based on changes in the facility and total debt has been increased to reflect the receivables program.
Fitch's key assumptions within the rating case for the issuer include:
-The Rexam transaction will close in 1H16;
-Ball will not repurchase a material level of shares until net leverage, as defined by Ball, decreases below 3x;
-Margin expansion, outside of restructuring costs, of at least 200 bp through 2017 driven by increased scale and synergy opportunities;
-Synergy benefits of approximately $300 million three years after close;
-FCF in excess of $650 million in 2017;
-Leverage at the end of 2016 in the lower 4x range, decreasing to less than 3.5x during 2017.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
-Sustained leverage greater than 3.5x gross debt-to-EBITDA, including debt factoring receivables. Upon closure of the transaction, the leverage target would be increased to 4.0x reflecting the improvement in Ball's business risk profile, profitability and financial flexibility owing to the combined capabilities, production efficiencies and scale of these No. 1 and 2 global beverage-can manufacturers.
-Significant revenue decline/pressure on EBITDA causing a material drop in profitability and lower cash generation;
-Executional missteps combined with materially higher restructuring costs during the integration process such that Ball does not realize expected synergy benefits, leading to lower than expected margins, reduced cash generation, increased debt and higher leverage.
Positive: Positive rating actions are not anticipated in the intermediate term given the material increase in leverage due to the proposed transaction. Once the transaction closes, future developments that may, individually or collectively, lead to positive rating include:
-Sustained leverage less than 3.0x, including debt factoring receivables;
-Margin expansion sustained in the upper-teens range;
-FCF margin sustained in the mid-single-digit range.
Good Liquidity: Ball has good liquidity provided by the company's FCF, availability under its credit agreement, balance sheet cash and other facilities. Ball bolstered the necessary liquidity required for the proposed transaction through an initial $3 billion multicurrency RCF maturing in February 2018 that was since reduced to $2.25 billion and GBP3.3 billion multicurrency unsecured bridge term-loan facilities. LTM FCF was $132 million as of Sept. 30, 2015 after adjusting for the factoring program.
At Sept. 30, 2015, taking into account outstanding letters of credit and excluding availability under the accounts receivable securitization program, approximately $2.2 billion was available under Ball's RCF. Cash at the end of 4Q15 was $224 million, with the majority held outside of the U.S. There are no legal or economic restrictions regarding the repatriation of cash held in countries outside the U.S. Following closure of the Brazilian joint venture transaction, Ball will no longer need to hold a higher level of cash in Brazil. Ball has material inter-company loans in Europe and China that allow the company to transfer cash efficiently.
Ball's securitization agreement, maturing May 2017, can typically vary between $90 million and $140 million depending on the seasonality of the company's business. The receivable securitization totalled $140 million at Sept. 30, 2015. The company has uncommitted, unsecured credit facilities, which Fitch views as a weaker form of liquidity. Ball had approximately $764 million of uncommitted lines available of which $89 million was outstanding and due on demand at the end of 3Q15.
Expected financing for the transaction will include a mix of secured bank loans, unsecured senior notes, a significant equity component and excess cash. In order to mitigate currency exchange rate risk, Ball entered into 'collar and option' contracts from February 2015 through the expected acquisition closing date with an aggregate notional amount of approximately $3.4 billion at Sept. 30, 2015. Ball also entered into interest rate swaps to minimize interest rate exposure associated with the anticipated debt issuances.
Fitch expects Ball will finance a substantial portion of the transaction with foreign currencies in various geographies, effectively mitigating the deleveraging risk from trapped foreign cash due to the significant international cash generation of the combined company