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Atotech UK Topco Ltd -- Moody's upgrades Atotech's CFR to B1, stable outlook

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Rating Action: Moody's upgrades Atotech's CFR to B1, stable outlookGlobal Credit Research - 25 Feb 2021London, 25 February 2021 -- Moody's Investors Service ("Moody's") has today upgraded Atotech UK Topco Ltd's (Atotech) corporate family rating (CFR) to B1 from B2 and its probability of default rating (PDR) to B1-PD from B2-PD. Concurrently, Moody's has assigned a B1 rating to the new backed senior secured term loans of $1,350 million and E200 million due in 2028 and the new $250 million backed senior secured revolving credit facility due in 2026, all co-borrowed by Alpha 3 B.V., Alpha US BidCo, Inc., Atotech B.V., and other entities.The outlook on all entities is stable.Moody's has withdrawn the ratings of all previous debt instruments which were fully repaid and cancelled. This includes the B1 ratings of the $1.6 billion senior secured term loans due in 2024 and the $250 million senior secured revolving credit facility due in 2022, all co-borrowed by Alpha 3 B.V., Alpha US BidCo, Inc. and other entities, the Caa1 rating of the $425 million senior unsecured notes due 2025, co-issued by Alpha 3 B.V. and Alpha US BidCo, Inc. and the Caa1 rating of the $300 million PIK toggle notes due in 2023 issued by Alpha 2 B.V, a 100% subsidiary of Atotech UK Topco Ltd and parent company of Alpha 3 B.V.This concludes the review for upgrade initiated by Moody's on 27 January 2021.RATINGS RATIONALEToday's ratings action reflects Atotech's successful initial public offering (IPO) of 29.3 million of its common shares at $17 per share. The Carlyle Group, which refrained from selling additional common shares as part of the IPO, continues to be the majority shareholder holding approximately 81% of Atotech common shares. The company used the net proceeds after fees and expenses of around $473 million, around $71 million of cash on balance sheet and draw down around $100 million under the previous $250 million RCF to redeem the outstanding $219 million PIK toggle notes and the outstanding $425 million senior unsecured notes.In addition, Atotech is now refinancing its existing $1,439 million senior secured Term Loan B as well as the existing $250 million RCF, which is currently drawn with $100 million, with a new $1,350 million and E200 million Term Loan maturing in 2028 and a new $250 million RCF maturing in 2026. Both new facilities are senior secured with a similar guarantee and security package as the current senior secured facilities. The new RCF is expected to be undrawn at closure of the transaction. Accordingly, Atotech's total debt will be around $500 million lower than before the IPO equivalent to a reduction of the Moody's adjusted debt / EBITDA metric by around 1.6x.Besides the immediate debt reduction post IPO and refinancing, today's ratings upgrade also reflects Atotech's new, more conservative financial policy with targeted reported net leverage of 2x -- 3x compared with around 3.9x at the end of 2020 pro forma the IPO and the debt refinancing. In addition, the company does not intend to pay a dividend for the foreseeable future. The more conservative financial policy results in an overall more positive assessment of Atotech's governance. Accordingly, environmental, social and governance (ESG) considerations were a key factor for this rating action.On 18 January 2021, Moody's upgraded Atotech's CFR to B2, reflecting the company's improving operating performance, which hit the trough in the second quarter of 2020, and the rating agency's expectation that its financial performance will continue to recover in 2021. In Q2 2020, Atotech suffered from the severe downturn of the automotive industry, as much of the world's car production had temporarily stopped due to the coronavirus pandemic. However, driven by the resilient electronics end-market, which accounts for approximately 64% of revenues, and recovering automotive markets, Atotech's sales and EBITDA generation returned to growth in Q3 2020.In addition to the rating agency's continued expectation of EBITDA growth in 2021-22, lower interest expenses due to the reduced debt burden will result in higher than previously projected free cash flow (FCF) generation of around $150 million annually. Accordingly, Moody's expects that Atotech's Moody's adjusted debt / EBITDA metrics, which stood at around 5.8x at the end of 2020 pro forma the IPO and refinancing, will improve around 5.3x in 2021 and below 5x in 2022. Due to the projected material accumulation of cash over the next two years, the rating agency also forecasts that the company's Moody's net debt / EBITDA ratio falls faster from around 5.08x at the end of 2020 on pro forma basis to around 3.5x at the end of 2022.Atotech's B1 CFR reflects the company's (1) leading position in the niche plating chemicals market; (2) high barriers to entry due to its well invested production base, certification required to be an approved supplier for mission critical products, history of collaboration with top Original Equipment Manufacturers (OEMs) and its portfolio of over 2,000 patents; (3) strong reputation with customers, which benefits from their focus on quality and technical competence as well as innovation and R&D; and (4) high reported EBITDA margins in the high twenties percent, reflective of its strategic focus on the most value added segments of its markets. At the same time, Atotech's CFR remains constrained by the relatively smaller size compared with its closest competitors in both key end-markets as well as its still relatively high Moody's adjusted debt / EBITDA metric.LIQUIDITYAtotech has a good liquidity position supported by a large $241 million cash balance at the end of December 2020 pro forma the transaction, albeit about $68 million was located in China, and a new undrawn $250 million revolving credit facility (RCF) due in 2026. In addition, Moody's expects positive free cash flow (FCF) in 2021-22, which further supports the company's liquidity profile. The company's debt maturity profile is also favourable with the term loan only maturing in 2028.STRUCTURAL CONSIDERATIONSAtotech capital structure has been simplified with the repayment of the old debt instruments which had different seniorities and therefore carried different instrument ratings. Atotech's new senior secured term loans and RCF are guaranteed by a substantial number of subsidiaries of the group and secured on a first priority basis by a material amount of assets owned by the group, excluding those in China. The debt instruments have guarantees from entities that represent around 47% of EBITDA and 62% of assets. However, despite their senior secured status, all debt instruments are rated B1 in line with the CFR as there are no subordinated debt instruments in Atotech's capital structure.RATING OUTLOOKAtotech's stable outlook reflects the good liquidity position and the rating agency's expectation that the company's Moody's adjusted leverage will reduce to below 5.5x at the end of 2021. Atotech's strong product portfolio, high EBITDA margins and cash flow generation should enable the company to continue to benefit from the forecasted recovery of its key end markets.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if (1) Moody's adjusted debt/EBITDA falls towards 4.0x; and (2) retained cash flow/net debt increases above 15%, both on a sustained basis; (3) Moody's adjusted EBITDA margins remains in the high 20s in terms of percentage and (4) liquidity position remains strong.The ratings could be downgraded if (1) the company Moody's adjusted debt/EBITDA remains above 5.5x; (2) retained cash flow/net debt falls below 10%; and (3) if Atotech does not continue to generate positive FCF.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEAtotech UK Topco Ltd (Atotech) is the global leader in specialty electroplating chemicals. Electroplating is coating a material with a thin layer of precious metal to enhance its resistance or look. For 2019, Atotech reported $1.19 billion of revenue and generated Moody's-adjusted EBITDA of $339 million (28.5% margin). Established in 1869, Atotech had been part of Total SE (Aa3 Negative) since 1977. In January 2017, the Carlyle Group acquired Atotech from Total SE for around $2.7 billion. Atotech became a listed company on 04 February 2021 but the Carlyle Group continues to be the majority shareholder.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. 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