Rating Action: Moody's upgrades ASP Emerald Holdings, LLC to B2; outlook stable
Global Credit Research - 30 Jul 2020
New York, July 30, 2020 -- Moody's Investors Service, ("Moody's") upgraded ASP Emerald Holdings, LLC's (Emerald) Corporate Family Rating (CFR) to B2 from B3 and Probability of Default Rating (PDR) to B2-PD from B3-PD. Moody's also assigned a B2 rating to Emerald Performance Materials, LLC's first lien term loan and senior secured revolving credit facility. The B2 rating on the existing revolving credit facility and Caa2 rating on the second lien term loan is expected to be withdrawn subject to the transaction closing as proposed. The outlook is stable.
"The upgrade reflects the improved capital structure, in which absolute debt levels have declined significantly as a result of proceeds from the CTS sale and the $100 million equity contribution from American Securities. The refinancing of the secured credit facilities also eliminates risk associated with the upcoming maturities," said Domenick R. Fumai, Vice President and lead analyst for ASP Emerald Holdings, LLC.
..Issuer: ASP Emerald Holdings, LLC
.... Probability of Default Rating, Upgraded to B2-PD from B3-PD
.... Corporate Family Rating, Upgraded to B2 from B3
..Issuer: Emerald Performance Materials, LLC
....Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD3)
....Senior Secured 1st Lien Term Loan , Assigned B2 (LGD3)
..Issuer: ASP Emerald Holdings, LLC
....Outlook, Remains Stable
..Issuer: Emerald Performance Materials, LLC
....Outlook, Remains Stable
The upgrade to the B2 CFR is supported by Emerald's revised capital structure and lower balance sheet debt, reduced financial leverage metrics and improved interest coverage. Emerald reduced over $200 million of debt with the proceeds from the sale of its CVS Thermoset Specialties (CTS) business to Huntsman Corporation (Baa3 stable) for $300 million. The company is now refinancing the capital structure with a new $425 million first lien term loan and $100 million additional equity investment by its sponsor, American Securities, in the form of perpetual convertible preferred equity to two parent holding companies. In turn, Emerald will receive $100 million from the parent holding companies in exchange for common equity that will be used along with the first lien proceeds, borrowing from the new revolving credit facility and some balance sheet cash towards refinancing the existing debt and paying fees and expenses. The combination of lower debt and interest expense should enable the company to increase free cash flow generation. Emerald's credit profile further reflects its specialty chemical portfolio that serves a diverse number of end markets and enjoys significant exposure to less cyclical food, beverage, flavors and fragrances and personal care products. The credit profile also incorporates Emerald's meaningful market positions in many of its niche market segments and benefits from vertical integration. Moody's expects adjusted Debt/EBITDA to decline from 6.4x as March 31, 2020, towards 5.0x in FY 2020.
Emerald's B2 CFR is constrained by its modest size, with pro forma sales of approximately $480 million for the last twelve months ending March 31, 2020. Emerald also has a relatively small asset base with net PP&E of roughly $311 million as of March 31, 2020. Although Emerald Kalama Chemicals' (EKC) EBITDA margins are consistently in the 20% range and its existing business more resilient than CTS, the company also has exposure to end markets that are more cyclical such as rubber, automotive, sealants, coatings, oil and gas and mining. The divestiture of the CTS business, which enjoyed approximately 30% margins, limits Emerald's upside growth potential given the mature nature of many of its remaining end markets and reduces business diversity.
Emerald's liquidity is good supported by its $75 million senior secured revolver, which had $50 million drawn as a result of precaution as the coronavirus pandemic escalated in March and $33 million in cash at the end of the first quarter. Pro forma for the proposed refinancing, the company expects to have roughly $50 million of revolver availability with sufficient cash balances and expectations for positive free cash flow.
Emerald's current debt capital consists of the existing $379 million outstanding first lien term loan rated B2 and the $167 million outstanding second lien term loan. The Caa2 rating on the second lien reflects the preponderance of first lien debt that ranks ahead in terms of priority. Moody's expects to withdraw the ratings on the second lien term loan once the transaction is completed. The B2 ratings assigned to the proposed $425 million first lien term loan and $75 million first lien revolving credit facility are in line with the B2 CFR, reflecting the existence of only first lien debt in the capital structure following the repayment of the second lien term loan.
The stable outlook assumes that financial performance and credit metrics remain appropriate for the B2 rating, including maintaining adjusted leverage between 4.5x to 5.0x and that the company generates sustained positive free cash flow in 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Although not likely over the next 12 months, Moody's would consider upgrading the ratings if the company achieves sustained adjusted financial leverage below 4.5x (Debt/EBITDA) and Retained Cash Flow-to-Debt (RCF/Debt) sustained above 15%. An upgrade would also require the company to increase scale and business diversity through organic growth.
Moody's would likely downgrade the ratings if adjusted leverage increases above 5.5x for a prolonged period, or free cash flow falls below $20 million in 2021. Ratings could also be downgraded if there is a significant increase in gross debt as a result of an acquisition or sizable cash dividend to the sponsor, indicating a return to a more aggressive financial policy. Despite the high dividend on the preferred stock, Moody's doesn't view the perpetual convertible preferred equity as debt because it is being held by the sponsor, there is no cash dividend provision and expectations that the convertible perpetual preferred equity will not be redeemed prior to the first lien term loan B. However, if the preferred stock is redeemed with cash from the borrower in a subsequent financing or dividend to the parent holding companies prior to a material reduction in the outstanding term loan debt, it could result in a negative outlook or rating downgrade.
Moody's also considers environmental, social and governance risks in Emerald's rating. Governance risks are elevated due to private equity ownership by American Securities, which includes a board of directors with majority representation by members affiliated with the sponsor, and reduced financial disclosure requirements as a private company. American Securities has already extracted over $190 million in dividends since acquiring Emerald in 2016; however, the recent equity investment signals a more conservative financial policy than in the past. As a specialty chemical company, Moody's characterizes environmental risk as moderate; Emerald has a modest amount of accruals for environmental liabilities.
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.
Emerald Performance Materials, LLC, headquartered in Vancouver, Washington, is a producer of specialty chemicals used in a wide range of food, personal care and industrial applications. Emerald Kalama Chemical (EKC) operates in three business segments: 1) Consumer Specialties, 2) Industrial Specialties and 3) Antioxidants and Accelerators. The company was acquired in late 2014 by private equity firm American Securities from prior private equity owner Sun Capital Partners Inc. for $300 million. Following the sale of the CVC Thermoset (CTS) division, Emerald generated pro forma sales of about $480 million for the last twelve months ended March 31, 2020.
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.
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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.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Domenick Fumai 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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