Rating Action: Moody's assigns Baa1 ratings to Ecolab's new senior notes; outlook remains positive
Global Credit Research - 10 Aug 2020
New York, August 10, 2020 -- Moody's Investors Service, ("Moody's") assigned Baa1 to approximately $1.1 billion in new debt issuance of Ecolab Inc. ("Ecolab"), consisting of 10 year and 30 year notes. Proceeds from the debt issuance, together with cash sourced from the separation of the Upstream Energy business earlier this year, are expected to be used to repay near term maturities of $1.02 billion due in 2021, private placement debt of $250 million due in 2023, and to pay a make whole premium of roughly $80 million. The outlook on Ecolab's ratings remains positive.
"The refinancing represents prudent liability management, cleans up near and medium term maturities, and lowers the company's cost of debt capital," according to Joseph Princiotta, Moody's SVP and lead analyst for Ecolab, Inc.
Assignments: ..Issuer: Ecolab Inc.
....Senior Unsecured Regular Bond/Debenture , Assigned Baa1
In December of last year, Moody's affirmed the ratings on Ecolab Inc.'s senior unsecured notes at Baa1 but changed the outlook on the ratings to positive from stable. The change in outlook reflects Ecolab's strong track record of growing and improving the portfolio through organic growth as well as M&A activity, while maintaining a strong balance sheet with only occasional deviations from the company's net leverage targets. The positive outlook also reflects good scale and end market diversity, strong and consistent free cash flow and relatively strong and stable EBITDA margins.
The outlook remains positive despite the impact of COVID 19, particularly the impact on the Institutional Segment, as Moody's believes the fundamentals and longer-term outlook could still support an argument for a higher rating, although the timeline for considering an upgrade is likely to be extended due to COVID-19. The diversity and resilience in the portfolio were evident in the very difficult second quarter, with cash flow and the cash build helping to sustain net debt/ EBITDA leverage (unadjusted) at 2.2x at June 30, 2020 on an LTM basis. Severe conditions in the Lodging and Dining businesses within the Institutional segment were partially offset by improved growth in the Specialty, Healthcare and Life science businesses. On a Moody's gross adjusted basis, leverage as of June 30, 2020 was in the mid-2x range.
Moody's notes that recovery in the institutional segment improved sequentially on a monthly basis through the second quarter, with further improvement in the second half expected. However, any improvement in the Institutional segment, which accounted for about a quarter of the portfolio on a pre-COVID basis, is expected to be slow and of uncertain shape, at least until fears of the virus subside. Moody's expects that a more robust recovery in Lodging and Dining is probably not likely until well into 2021 or later.
Ecolab's strong credit profile is supported by its leading market positions in the commercial cleaning and sanitation market, strong competitive positions in water treatment and process chemicals for industrial and institutional applications. Key business sectors, such as water treatment, institutional services and food and beverage enjoy significant barriers to entry; including on-site technical service requirements, patents and long-term customer relationships. Ecolab enjoys geographic, customer and end-market diversity, good long-term growth prospects, high profit margins, relatively steady EBITDA and strong free cash flow generation.
The strong credit profile is tempered by event risk associated with the company's ongoing M&A activity that occasionally stresses the balance sheet. In addition, with close to half of revenues outside the US, Ecolab faces foreign currency exposure. Competitive activity and portfolio churn are also modest negatives in the credit profile, mitigated by Ecolab's strong competitive position and barrier-to-entry attributes mentioned above. The ratings anticipate continued M&A activity focusing on adjacencies and bolt-on acquisitions to supplement organic growth. However, large debt-financed acquisitions cannot be ruled out in a post-COVID world or if market valuations of target companies improve.
Earlier this year Ecolab completed the separation of its Upstream Energy business, leaving only the Downstream Energy business in the portfolio, representing only about 7% of sales (down from 23% previously for the total energy business). Proceeds from the separation will be used to pay dividends, reduce debt and/or complete share repurchases. We expect the separation of the Upstream Energy business will strengthen margins and improve margin stability in Ecolab's remaining portfolio.
Ecolab's liquidity is excellent, supported by significant cash balances ($1.4 billion of cash and cash equivalents as of June 30, 2020), a $2.0 billion multi-year credit facility due November 2022, and a $500 million 364-day revolving credit facility. The $2.0 billion credit facility supports the company's Prime-2 (P-2) short-term rating on US and European commercial paper programs. As of June 30, 2020, there was $314 million and $203 million outstanding under the Euro and US CP programs respectively; there were no borrowings under either credit facilities at the end of the reporting period. Moody's expects Ecolab will generate significant positive free cash flow in 2020 and 2021 (which we define as operating cash flow less capex and dividends).
Upcoming debt maturities are comprised of $1.02 billion of senior notes due 2021 and $500 million of senior notes due 2022. The current issuance and subsequent repayment of the 2021 senior notes and 2023 private placement notes eliminates refinancing risk, extends the maturity profile and adheres to management's prudent debt management strategy.
The positive outlook reflects our expectation that management will continue to target 2.0x net leverage (before Moody's adjustments) and adhere to a balanced approach to share repurchases, acquisitions, and debt management so as to protect credit metrics. The positive outlook also anticipates continued organic and inorganic growth in EBITDA over the next 12-18 months to offset any stress in metrics resulting from the loss of EBITDA from the spin off of the upstream energy business.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if Ecolab continues to target net unadjusted leverage at 2.0x (roughly 2.4x on a Moody's adjusted basis) while retained cash flow to debt is sustained above 25%; achieving these metrics might require management to use a portion of any separation proceeds to reduce debt. The ratings could be downgraded if Ecolab were to change its financial philosophy to target higher unadjusted net leverage, i.e, closer to 2.5x, or if large acquisitions stress the balance sheet with adequate recovery extending beyond a two year horizon.
ESG factors are not material to the current rating action. Environmental, social and governance factors in general, and environmental risks specifically, are not likely to be material considerations in the rating process going forward. Ecolab buys, reformulates, processes and sells large quantities of commodity and specialty chemicals, and has 28 sites in the US subject to waste disposal site cleanup activities imposed by CERCLA. However, Ecolab's environmental profile is more favorable than most in the industry as its programs and services target food safety, water treatment, cleaner industrial water, sanitized spaces and energy conservation to the food, healthcare, industrial, energy and hospitality markets. Governance is strong and reasonably transparent with an independent board and clear and consistent financial policies including targeted net leverage (unadjusted) of 2.0 times.
Ecolab Inc. (Ecolab), headquartered in St. Paul, Minnesota, is a leader in institutional, water, hygiene and energy technologies and services that provide and protect clean water, safe food, abundant energy and healthy environments. Revenues are geographically diverse with about 58% of revenues in the US, 24% in EMEA, 12% in Asia, and 6% in LA. Ecolab delivers programs and services to the food, energy, healthcare, industrial and hospitality markets in more than 170 countries. Ecolab had revenues from continuing operations of $12.2 billion for the twelve months ended June 30, 2020.
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.
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 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_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.
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Joseph Princiotta Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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