BME Group Holding B.V. -- Moody's affirms BME's B3 CFR; outlook remains positive

Rating Action: Moody's affirms BME's B3 CFR; outlook remains positiveGlobal Credit Research - 01 Mar 2021Frankfurt am Main, March 01, 2021 -- Moody's Investors Service ("Moody's") affirmed the B3 corporate family rating (CFR) and B3-PD probability of default rating for BME Group Holding B.V.'s (BME) following the company's proposal to raise E228 million in incremental term loan B to redeem E223 million of share capital. Concurrently, Moody's has affirmed the B2 ratings of the first lien senior secured credit facilities, consisting of the first lien senior secured term loan due 2025, the first lien term loan B due 2026, which is proposed to be amended and upsized and the first lien senior secured revolving credit facility (RCF) due 2025. The outlook is positive.RATINGS RATIONALEThe affirmation of the ratings with a positive outlook reflects the relative robust operating performance of BME over the last quarters combined with the expectation of a continuation of this trend. The proposed shareholder distribution reduces the positive rating pressure, as leverage is increased again and reflects BME's tolerance for high leverage, a key governance issue. The proposed debt-financed shareholder distribution will increase its leverage by around 0.8x, to around 6.6x Moody's-adjusted gross debt/EBITDA, based on preliminary full-year 2020 results and pro forma the earnings of Saint-Gobain Distribution the Netherlands (SGBD NL) acquisition.The maintained positive outlook reflects Moody's expectation that BME's earnings will continue to improve through a combination of organic growth, earnings contribution from the SGBD NL acquisition (expected to be completed during 2021), providing some offset to an increased amount of debt in BME's capital structure following the shareholder distribution. This is based on Moody's view that the company will continue to benefit from its 60% exposure to the relatively stable renovation, maintenance and improvement (RMI) market, while improving its profitability through its strategic initiatives and realization of synergies from recent acquisitions. The forward view does not incorporate any further debt-funded dividends or acquisitions until leverage metrics have been materially improved.BME's B3 CFR continues to reflect (1) the company's leading position in the building materials distribution market in Europe, with diversification across six core European markets; (2) its significant exposure of 60% to the relatively stable renovation, maintenance and improvement market (RMI); (3) its flexible cost base and inherent countercyclical nature of working capital in the distribution industry; and (4) its significant portfolio of owned real estate assets.At the same time, the rating incorporates (1) BME's operations in a highly fragmented and competitive market, reflected in its low Moody's-adjusted operating margin of around 3.5%; (2) history of sensitivity to new construction activity, although mitigated by its exposure to the RMI market which is expected to be more stable; (3) high leverage, as reflected in its Moody's-adjusted gross debt/EBITDA of 6.6x based on preliminary full-year 2020 results and pro forma the SGBD NL acquisition, and (4) risk of shareholder distributions and debt-financed acquisitions.RATIONALE FOR POSITIVE OUTLOOKThe positive outlook reflects Moody's forecasts of a broadly flat organic revenue growth and an adjusted operating margin improving to 4.0% through 2022, resulting in Moody's adjusted debt/EBITDA moving below 6.0x by year-end 2022 and continued positive FCF, with FCF/Debt in low single digits. Furthermore, Moody's also expects that SGBD NL acquisition will be successfully closed and integrated into the group in the next 12-18 months. The forward view does not incorporate any further debt-funded dividends or acquisitions. The positive outlook will be removed in case there any deviations from the base case forecast.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe company's credit rating can be improved if the company chooses to adopt and demonstrates track record of a disciplined financial policy, resulting in leverage reduction on both gross and net basis in the next 12-18 months. An upgrade could result if the company's Moody's adjusted debt to EBITDA moves sustainably below 6.25x and RCF/Net Debt above 10%, while maintaining adequate liquidity supported by positive FCF generation, with FCF/ Debt in the low single digits.Conversely, negative rating pressure could arise if Moody's adjusted operating margin deteriorates; Moody's adjusted gross debt/EBITDA increases above 8x; Moody's adjusted EBITA/ Interest declines below 1x; or FCF turns negative on a sustained basis resulting in deterioration of company's liquidity profile; or the company undertakes further debt-funded shareholder distributions or acquisitions, which result in weakening of credit metrics.STRUCTURAL CONSIDERATIONSThe senior secured 1st lien facilities rank pari passu and are guaranteed by subsidiaries of the group accounting for at least 80% of consolidated EBITDA.The refinancing transaction closed in October 2020 took out the first loss cushion provided by the second lien term loan through increasing the senior secured first lien borrowings. In the context of BME's strong positioning in the B3 rating category and the positive outlook on the rating, Moody's has left the instrument ratings on the 1st lien facilities unchanged at B2, i.e. one notch above the CFR.If Moody's assessment of BME rating positioning changes to the negative, such as through a stabilization of the outlook or more negative rating action, the rating agency will remove the one-notch rating differential and align the 1st lien instrument ratings with the CFR.LIQUIDITYMoody's expects BME to operate with adequate liquidity over the next 12-18 months. This reflects BME's anticipated E115 million cash balance (pro forma SGBD NL acquisition) and E195 million available RCF. These sources, together with funds from operations, are sufficient to cover any seasonality in working capital, as well as the company's capital spending needs. Moody's projects that the company will generate consistently positive FCF.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.PROFILEBased in Schiphol, the Netherlands, BME Group Holding B.V. is the third-largest European building materials distributor operating in Germany, the Netherlands, Belgium, France, Switzerland and Austria. In November 2019, the company was acquired by Blackstone from CRH plc, one of the world's largest building materials companies, for a total consideration of E1.7 billion as CRH plc decided to focus on its heavy side building materials business. In 2020 BME generated E3.9 billion in revenues and E240 million of management-adjusted EBITDA.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. 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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 UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. 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