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Centrient Holding B.V. -- Moody's downgrades Centrient's first lien facilities to B2, affirms B2 corporate rating, outlook negative

·15 min read

Rating Action: Moody's downgrades Centrient's first lien facilities to B2, affirms B2 corporate rating, outlook negativeGlobal Credit Research - 23 Feb 2021Frankfurt am Main, February 23, 2021 -- Moody's Investors Service ("Moody's") has today affirmed Centrient Holding B.V.'s (Centrient) corporate family rating (CFR) and probability of default rating (PDR) at B2 and B2-PD respectively. The ratings of the first lien senior secured term loan B and senior secured revolving credit facility borrowed by Centrient have been downgraded to B2 from B1. The outlook on the ratings has been changed to negative from stable.RATINGS RATIONALEOn 15 February 2020 Centrient announced its intention to acquire an 80% stake in Astral SteriTech (Astral). The purchase price and related fees will be financed via a E180 million add-on to Centrient's existing E335 million term loan B. As part of the transaction the company will also upsize its revolving credit facility to E85 million from currently E75 million. The remaining 20% stake in Astral will be acquired via an earn-out structure at a later stage.The change in outlook on the B2 rating, reflects Centrient's high adjusted pro forma 2020 gross leverage of 6.7x and Moody's expectation that gross leverage will remain above the rating agency's guidance for a B2 rating in 2021. Leverage will only reach levels more commensurate with a B2 rating in 2022. Moody's at this stage does not consider the earn-out clause as debt, as under Moody's base assumptions it is unlikely that the earn out will result in additional material debt like liabilities. Moody's will reconsider the treatment of the earn out liability, if the likelihood of a payout increases. The all debt financing of the acquisition and the additional earn out construct in our view are reflective of a high tolerance for financial risk of the company and the sponsor, which is a factor constraining the rating.In our view the acquisition of Astral strengthens Centrient's business profile and is in line with the company's ambitions to strengthen its finished dosage forms (FDF) business. The market for sterile injectable beta lactams is commanding higher growth rates and margins than Centrient's traditional end markets. We understand that Astral's high EBITDA margins are reflective of high barriers to entry and a structural shortage of sterile injectable beta lactams. Furthermore, we understand that Astral benefits from a favorable cost position. The acquisition will increase Centrient's diversification and significantly increase the scale of its FDF business. Centrient's rating continues to reflect the company's leading position in the fragmented global antibiotics market. The company is operating a highly regulated market and benefits from long-standing customer relationships underpinned by high switching cost. Despite the Astral acquisition improving Centrient's diversification, the majority of the company's revenues continues to be generated within its non-sterile SSP & SSC business. These markets continue to be fragmented and characterized by price pressure. The rating is supported by an adequate liquidity profile, Centrient's FCF in relation to debt is expected to be moderate in 2021.LIQUIDITYCentrient's liquidity profile is adequate. Pro-forma the proposed acquisition financing the company will have a starting cash balance of E19 million. The company's liquidity profile will furthermore benefit from E80 million of availability under its E85 million revolving credit facility. In combination with expected FFO generation of around E45 million in 2021 these sources provide the company with an adequate liquidity buffer to accommodate day to day cash needs (estimated to be around 3% of sales), swings in working capital and capital expenditures, which we forecast to be at around E30 million in 2021.STRUCTURAL CONSIDERATIONSThe group's first-lien senior secured facilities, including the E85 million RCF and the E515 million senior secured term loan B, are rated B2. These instruments benefit from a security package, including share pledges, intercompany receivables and bank accounts. The facilities also benefit from the protective layer of loss absorption provided by the E75 million equivalent second-lien loan in an event of default. However, the second-lien loan is of small size relative to the now upsized senior secured term loan B and revolving credit facility and does not provide enough loss absorption cushion for the first-lien facilities to be rated above the company's corporate family rating.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSPositive pressure on the rating could arise if the forward-integration strategy is successfully carried out, for instance, through a consistent strengthening of the FDF business, leading to more diversified production offerings and a larger scale; the company's Moody's-adjusted leverage ratio falls below 5.0x on a sustained basis; and its FCF/debt is consistently in the high single digits.Negative pressure on the rating could build up if competition intensifies, resulting in a deterioration in the operating performance of the core products (SSP and SSC); Moody's-adjusted leverage does not decrease towards 6x by FYE 2021 and to below 6x thereafter an inability to generate positive FCF would also be negative for the rating.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.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 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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