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ATS Automation Tooling Systems Inc. -- Moody's assigns B2 rating to ATS's new notes

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Rating Action: Moody's assigns B2 rating to ATS's new notes

Global Credit Research - 14 Dec 2020

Toronto, December 14, 2020 -- Moody's Investors Service, ("Moody's") today assigned a B2 rating to ATS Automation Tooling Systems Inc.'s (ATS) proposed senior unsecured $300 million notes due 2028. ATS's Ba3 Corporate Family Rating, Ba3-PD Probability of Default Rating, and SGL-2 Speculative Grade Liquidity Rating remain unchanged. The outlook remains stable.

Proceeds from the proposed $300 million issuance will be used to refinance ATS's senior unsecured $250 million notes due 2023 and for general corporate purposes, enhancing ATS's maturity profile. Post transaction, ATS's pro-forma leverage for the twelve months ended September 2020 will increase by 0.3x to 2.6x.

Assignments:

..Issuer: ATS Automation Tooling Systems Inc.

....Senior Unsecured Regular Bond/Debenture, Assigned B2 (LGD5)

RATINGS RATIONALE

ATS' Ba3 Corporate Family Rating reflects the company's: (1) low leverage (pro-forma 2.6x LTM Sep 20); (2) stable margins (11% Sep 20); (3) significant revenue concentration in the less cyclical life sciences end market (about 50% of revenues); and (4) good liquidity. The rating is constrained by: (1) small scale among large players in a competitive environment; (2) the volatile nature of order bookings and cyclicality of the manufacturing industry; and (3) an active acquisition strategy involving event and execution risks.

The stable outlook reflects Moody's expectation that despite economic uncertainties, ATS will demonstrate resilience, maintaining strong credit metrics and good liquidity.

ATS has good liquidity. Pro-forma for the transaction, sources total close to C$1.1 billion as of September, consisting of C$200 million in cash on hand, about C$730 million of availability under the company's $750 million revolver due August 2022 (after letters of credit) and close to C$140 million in free cash flow over the next twelve months. The company has no upcoming debt maturities or refinancing risk until the revolver comes due. Moody's expects the proposed acquisition of CFT S.p.A. to be financed with a combination of cash and revolver borrowings likely in early 2021. ATS's revolver is subject to leverage and coverage covenants with which the company will remain comfortably in compliance. ATS has some flexibility to boost liquidity from asset sales.

ATS has two classes of debt; secured C$750 million revolving credit facility (unrated) and, pro-forma for the transaction, US$300 million unsecured notes due 2028 (rated B2). The notes, which are guaranteed by certain material subsidiaries, are rated two notches below the corporate family rating to reflect their junior position relative to the sizeable, priority-ranking secured revolver.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING

The rating could be upgraded if debt to EBITDA is sustained comfortably below 2.5x (pro-forma 2.6x LTM Sep 20) while maintaining stable organic revenue growth and positive free cash flow generation (C$9M LTM Sep 2020).

The rating could be downgraded if debt to EBITDA is maintained above 4x (pro-forma 2.6x LTM Sep 20) or EBITA margins decline towards 5% (11% LTM Sep 20).

The principal methodology used in this rating was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

ATS Automation Tooling Systems Inc., headquartered in Cambridge, Ontario designs, engineers, builds and services automated manufacturing systems and production lines for multinational companies. Revenue for the twelve months ended September 2020 was about C$1.4 billion. The company is listed on the Toronto Stock Exchange and has a market capitalization of about C$2.1 billion as of December 7th, 2020.

REGULATORY DISCLOSURES

For 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.

This rating is 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_1133569.

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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Whitney Leavens Analyst Corporate Finance Group Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Donald S. Carter, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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