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Rating Action: Moody's assigns Ba1 rating to Energizer's Term Loan offering
Global Credit Research - 08 Dec 2020
New York, December 08, 2020 -- Moody's Investors Service, ("Moody's") today assigned a Ba1 rating to Energizer Holdings, Inc.'s ("Energizer") new $1.2 billion secured term loan B offering due 2027. Moody's also assigned a Ba1 rating to the extended $400 million revolver expiring in 2025 that will replace the 2023 revolver. Moody's expects to withdraw the Ba1 ratings on the existing revolver expiring in 2023 and existing term loans upon completion of the refinancing. All other ratings for Energizer including the B1 Corporate Family Rating and the B1-PD Probability of Default Rating remain unchanged. The company's SGL-1 Speculative Grade Liquidity Rating and stable outlook are unaffected. Proceeds from the new offering will be used to refinance the $277 million remaining on the secured term loan A, the $194 million remaining on the secured term loan B, and its $600 million unsecured notes due in 2027. Proceeds will also be used to pay fees and expenses related to the proposed debt offering. The rating outlook is stable.
The offering is credit positive because it extends the company's maturity profile and reduces cash interest expense. The next significant maturity is a $730 million unsecured note due July 2026.
The following ratings/assessments are affected by today's action:
..Issuer: Energizer Holdings, Inc.
....Senior Secured Bank Credit Facility, Assigned Ba1 (LGD2)
Energizer's B1 CFR reflects its concentration in the declining battery category that is facing a slow secular decline as consumer products are increasingly evolving toward rechargeable technologies. The ratings also reflect high event risk as Energizer has chosen to expand outside of the battery business -- through debt financed acquisitions -- into totally unrelated businesses. The company's high financial leverage, with debt to EBITDA at about 6.0x for the fiscal year ended 9/30/2020, following the acquisition of the Spectrum assets in January 2019, also limits financial flexibility to invest and sustain the dividend. The company's 6.0x financial leverage is pro-forma for its recent repayment of the $750 million notes due 2026. Leverage reduction has underperformed Moody's projections at the time of the Spectrum acquisition reflecting lower than expected earnings and this weakly positions the company within the rating category. Moody's expects debt to EBITDA to improve by nearly a turn to about 5.3x over the next 12 to 18 months through a combination of earnings growth, boosted by cost and operational synergies, and debt repayment. However, leverage could well increase again should Energizer pursue additional debt-financed acquisitions. Energizer's ratings are supported by its leading market position in the single use and specialized battery market, and portfolio of well-known brands in the battery and consumer car maintenance segments, and solid operating cash flow.
Energizer's organic revenue growth was 2.5% for the fiscal year ended September 30, 2020 driven by distribution gains and increased demand due to the impact of the coronavirus. Moody's expects demand for the company's battery business (77% of sales) and auto business (19%) to remain favorable over the next 12 months. The elevated demand for batteries reflects a high number of consumers working from home due to the coronavirus pandemic. Moody's expects Energizer's organic revenue growth to be around 0%-3% over the next year supported by volume gains and a slight pick-up in developed markets growth. That said, the company's profitability was negatively impacted by higher coronavirus related costs related to its workforce and higher sales of lower margin products in certain geographies. This reduced EBITDA margin by about 50 basis points to 21.4% in fiscal year 2020. Moody's expects profitability to improve over the next 12 -18 months reflecting continued cost reduction initiatives and productivity improvements. While Energizer continues to generate good free cash flow of about $150-$200 million per annum, the company's continued share buy backs at a time when its profitability has been weaker than expected is aggressive.
Environmental, Social and Governance considerations:
In terms of Environmental, Social and Governance (ESG) considerations, the most important factor for Energizer's ratings are governance considerations related to its financial policies and environmental risk. Moody's views Energizer's financial policies as aggressive given its debt financed acquisition of Spectrum into totally unrelated businesses. Energizer faces environmental risk from the disposal and recycling of batteries.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Moody's analysis has considered the effect on the performance of consumer sectors from the current weak U.S. economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook reflects Moody's expectation that Energizer's high financial leverage will improve over the next 12 to 18 months through EBITDA growth and debt repayment. Moody's also assumes that Energizer's very good liquidity will provide flexibility to integrate Spectrum and to repay debt.
The ratings could be downgraded if Energizer experiences significant operational disruption. Further, the ratings could be downgraded if the company's financial policies become increasingly aggressive, including additional debt funded acquisitions or shareholder returns. Moody's could also downgrade the ratings if the company's liquidity deteriorates or if debt to EBITDA is sustained above 5.5x.
Moody's could upgrade the ratings if Energizer consistently generates organic revenue growth and maintains a stable to higher margin and improves credit metrics. Debt/EBITDA would need to be sustained below 4.5x before Moody's would consider an upgrade.
The principal methodology used in these ratings was Consumer Packaged Goods Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1202237. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Energizer Holding, Inc. manufactures and markets batteries, lighting products, car fragrance and appearance, and engine additives around the world. The product portfolio includes household batteries, specialty batteries, portable lighting equipment and various car fragrance dispensing systems. Some key brands include Energizer, Eveready, Rayovac, STP, and ArmorAll. The publicly-traded company generates roughly $2.7 billion in annual revenues.
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.
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.
Chedly Louis VP - Senior Credit Officer 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 John E. Puchalla, CFA 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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