Diamond (BC) B.V. -- Moody's upgrades Diversey to B2 from B3; outlook positive

Rating Action: Moody's upgrades Diversey to B2 from B3; outlook positiveGlobal Credit Research - 25 Mar 2021New York, March 25, 2021 -- Moody's Investors Service, ("Moody's") has upgraded Diamond (BC) B.V. (Diversey)'s Corporate Family Rating ("CFR") to B2 from B3. At the same time, Moody's upgraded Diversey's first-lien term loan to Ba3 from B1, senior unsecured notes rating to Caa1 from Caa2 and Probability of Default rating to B2-PD from B3-PD. Moody's also assigned Ba3 rating to the amended and extended first lien senior secured revolving credit facility and a Speculative Grade Liquidity Rating ("SGL") assigned at SGL-2. No action is taken to the existing first lien senior credit revolving credit facility, which will be withdrawn at close. The upgrades reflect the progress by the company in issuing new equity capital and the company's intentions to use the proceeds to reduce debt, which would meaningfully improve the company's credit metrics. The upgrades and the assignment of the rating are conditioned on the successful completion of the IPO. The rating outlook is changed to positive from stable."The ratings are supported by the improving EBITDA and cash flow trend and a more favorable outlook arising from management actions as well as COVID related tailwinds and new business opportunities," according to Joseph Princiotta, Moody's SVP and lead analyst for Diversey. "An important development in the credit profile is the recent restoration of positive free cash flow through both improved earnings and reduced collective cash usage for restructuring and transitioning to freestanding status." Princiotta added. Upgrades: ..Issuer: Diamond (BC) B.V. .... Probability of Default Rating, Upgraded to B2-PD from B3-PD.... Corporate Family Rating, Upgraded to B2 from B3....Senior Secured 1st Lien Term Loan, Upgraded to Ba3 (LGD2) from B1 (LGD3)....Senior Unsecured Regular Bond/Debenture, Upgraded to Caa1 (LGD5) from Caa2 (LGD5) Assignments: ..Issuer: Diamond (BC) B.V. .....Speculative Grade Liquidity Rating, Assigned SGL-2....Senior Secured Revolving Credit Facility, Assigned Ba3 (LGD2)Outlook Actions:..Issuer: Diamond (BC) B.V.....Outlook, Changed To Positive From StableRATINGS RATIONALEOn March 1, 2021, Diversey Holdings, LTD, the ultimate parent company of Diversey, filed a Form S-1 registration statement with the SEC relating to an initial public offering (IPO) of ordinary common stock, and later disclosed its intent to issue up to $1.0 billion in new equity and to use the net proceeds to reduce debt. On March 24, 2021 the company announced the share price at $15, which would result in net proceeds and corresponding debt reduction of roughly $650 million, excluding the underwriter's 30 day option, which would lower Diversey's total debt to roughly $2.0 billion, compared to $2.7 billion at year end December 31, 2021. Moody's gross adjusted leverage will improve to roughly 5x from the mid 6x range at year end.Excluding the benefit of any prospective IPO and debt repayment, our near-term expectations for the company included adjusted financial leverage in the range of 6.0-6.5 times (Gross Debt/EBITDA), and positive and improving free cash flow. Metrics have trended in the right direction owing to EBITDA growth, with positive free cash flow expectation in the next 12 months. Gross adjusted leverage peaked at 8.4x in 2Q19 and improved to mid 6x at year end 2020.Diversey's credit profile also reflects moderately aggressive growth objectives focusing on new business wins and food service growth, both of which require investment, and occasional bolt-on acquisitions to support and drive growth. The credit profile also reflects fragmented and competitive markets and exposure to foreign exchange movements given that over 75% of its revenues are generated outside the U.S. Aside from the expected immediate step change in leverage with IPO net proceeds, Diversey expects to deleverage further through EBITDA growth overtime.With Food & Beverage end markets accounting for about 23% of revenues on a pre-pandemic basis, the pandemic posed a significant headwind and continues to be a source of some uncertainty to Diversey's sales and profits in these markets. However, the pandemic also introduced tailwinds to Diversey's P&L, including strong growth in healthcare end markets and opportunities in a number of cleaning and sanitizing product categories such as wipes, bulk cleaners, hand care and alcohol related products, all of which has helped offset headwinds caused by the pandemic beyond the first quarter last year. The rating is also supported by the company's exposure to stable and faster growing end markets, industry leading positions, a global footprint, low customer concentration and long-standing customer relationships.The credit profile is impacted by governance considerations. Although Bain Capital's ownership share is expected to remain in the mid-to-high 70% range post IPO, the IPO will create a publicly-traded float and expand the pool of equity holders that will provide improved public oversight and should encourage the company to follow more disciplined financial policy, enhance transparency, and better balance the interests of creditors and shareholders.Although environmental and social factors are not key drivers of today's action, environmental and social factors are viewed as favorable given the importance and positioning of cleaning products and services in the portfolio. In addition, as economies continue to re-open, Moody's expects healthy demand for cleaning products and services sold to consumer facing businesses and office and manufacturing buildings.Diversey's SGL-2 rating reflects good liquidity due to about $193 million in cash balance and $240 million availability ($9.9 million LC usage) under the $250 million revolving credit facility at December 31, 2020. The company recently received approval to increase the size of the revolver to $450 million, conditioned on the successful completion of the IPO. The revolver has a springing first lien net leverage test of 7.5x when the use of the revolver is more than 35% of the total revolving commitment. The company is expected to remain in compliance with the covenant over the next four quarters.The first half of the year is generally a significant working capital cash use period; the second half of the year working capital tends to be a source of cash. The company is expected to generate free cash flow in 2021 but to rely on the revolver from time to time for organic growth and working capital as well as for general corporate purposes. Most assets are encumbered under the secured facilities leaving little in the way of alternate liquidity.The positive outlook reflects the favorable credit metric outlook for the B2 rating, and the improving EBITDA outlook arising from management actions as well as COVID related tailwinds and new business opportunities. The positive outlook also reflects improved free cash flow through both improved earnings growth, cost reduction actions and reduced collective cash usage on transition & transformation, dosing & dispensing, restructuring, new business and acquisition activity, and the resulting restoration of positive free cash flow.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would consider an upgrade if the company continues to execute its business plan, growing revenues, EBITDA and cash flow supported by moderate M&A activity and further improvement in metrics, including gross adjusted leverage in the mid 4X range, RCF/TD above 10%, significant positive free cash flow, and maintenance of adequate liquidity.The ratings could be downgraded if the direction of performance and free cash flow is not positive and indicates the company will exceed some or all of its downgrade triggers -- leverage sustained above 5.5x, negative or minimal free cash flow for multiple quarters, or EBITDA to interest expense below 2.0 times. The ratings could also be downgraded if M&A activity is aggressive and stresses or spikes metrics beyond these triggers.The 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.Headquartered in Fort Mill, South Carolina, Diversey is a global supplier of cleaning, hygiene, sanitizing products, equipment and related services to the institutional and industrial cleaning and sanitation markets. The company generated approximately $2.6 billion of sales in 2020. Diversey is currently a portfolio company of Bain Capital.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. 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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. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. Further information on the UK 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. Joseph Princiotta Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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