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Harsco Corporation -- Moody's rates Harsco's new term loan and amended revolving credit facility Ba2; Ba3 CFR unchanged, outlook remains negative

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Rating Action: Moody's rates Harsco's new term loan and amended revolving credit facility Ba2; Ba3 CFR unchanged, outlook remains negativeGlobal Credit Research - 24 Feb 2021New York, February 24, 2021 -- Moody's Investors Service ("Moody's") assigned a Ba2 rating to the new $500 million first lien senior secured term loan B-3 and a Ba2 rating to the amended $700 million senior secured revolving credit facility of Harsco Corporation ("Harsco"). The company's other ratings, including the Ba3 Corporate Family Rating (CFR), and negative outlook were unchanged. Proceeds from the proposed term loan issuance will be used to refinance the company's existing $280 million term loan A-1 and $218 million term loan B-2. The transaction will be leverage neutral while improving the company's debt maturity profile and lowering its interest cost.The amended senior secured revolving credit facility will have a final maturity of March 2026, which is a twenty month extension to the maturity of the existing revolver. The new senior secured term loan B-3 will have a final maturity of March 2028, which is an extension from June 2024 for the existing term loan A-1 and December 2024 for the existing term loan B-2. The maturity extension of the term loan is limited to May 1, 2027, however, because of a springing maturity 91 days prior to the final maturity of the existing senior unsecured notes due July 31, 2027 (rated B1). This springing maturity is triggered if the unsecured notes are not redeemed or refinanced by May 1, 2027, which is not anticipated at this time.The company is also seeking covenant relief by extending the step down on the maximum net leverage ratio permitted under the credit agreement of 5.75x to December 31, 2021 from the current step down date of March 31, 2021, with quarterly step downs in 2022 and a final step down to 4.00x thereafter. The ratings on the existing senior secured term loans A-1 and B-2 (both rated Ba2) and senior secured revolving credit facility (rated Ba2) will be withdrawn upon closing of the transaction.Assignments:..Issuer: Harsco Corporation....Senior Secured 1st Lien Term Loan B3, Assigned Ba2 (LGD2)....Senior Secured Revolving Credit Facility, Assigned Ba2 (LGD2)RATINGS RATIONALEHarsco's Ba3 CFR reflects some recovery within its key end markets including rising capacity utilization and demand within the steel industry following a slowdown in steel production in the first half of 2020 due to COVID-19. Strong volume growth in several waste categories including healthcare, retail and certain industrial segments which were also impacted by lower volume growth due to COVID also supports the rating. Harsco's rating also reflects its long-standing customer relationships, which is reflected in its sizeable order backlog and provides some revenue visibility for services under contract. The rating is constrained by Moody's expectation of declining, but still high leverage, with adjusted debt to EBITDA projected to be maintained above 4x through the end of 2022. The rating also incorporates cyclicality in the Harsco Environmental segment, where sales are largely driven by steel production volumes and can be impacted by prolonged slowdowns in steel mill production or excess production capacity. Furthermore, Moody's expects a protracted recovery in Harsco's Rail segment, which is reliant on the capital expenditure budgets of its customers and is currently being affected by reduced ridership.The Ba2 rating on Harsco's proposed and existing senior secured bank credit facility, one notch above the Ba3 Corporate Family Rating, reflects the loss absorption provided by the unsecured debt in Harsco's capital structure.Moody's ratings also consider environmental risks including the various laws and regulations relating to the protection of the environment that Harsco is subject to. Many of these laws and government standards require Harsco to incur significant compliance costs and impose substantial monetary fines and/or criminal sanctions for violations. These risks are partially offset by the industry's high barriers to entry, including the high cost and complexity of obtaining regulatory permits, required in-house expertise on hazardous and radioactive waste laws and regulations and high initial capital spending, which all help Harsco in solving environmental problems.The negative outlook reflects Harsco's limited cushion to absorb any additional debt or earnings underperformance at the current rating level, given its already weak credit metrics.The speculative grade liquidity rating of SGL-3 reflects Moody's expectation of adequate liquidity for Harsco over the next 12-18 months, which incorporates $84 million of cash at the end of Q3 2020, ample revolver availability, anticipated positive free cash flow starting in 2022 and no near-term debt maturities.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSA ratings upgrade is unlikely given the negative outlook, however longer term would reflect adjusted debt to EBITDA at or below 3.5x, EBIT to interest expense at or above 2.5x and EBIT margin at or above 7.5%, all on a sustained basis. An upgrade would also require consistent positive free cash generation.The ratings could be downgraded should the company fail to reduce adjusted debt to EBITDA below 4.5x, improve EBIT to interest expense above 2x or should the company's EBIT margin fall below 5%. A ratings downgrade could also occur should the company experience any deterioration in liquidity.Following are some of the preliminary credit agreement terms, which remain subject to market acceptance.The proposed term loan agreement contains covenant flexibility for transactions that could adversely affect creditors, including incremental facility capacity subject to: (i) 2.25x senior secured net leverage ratio; plus (ii) $175 million (note that this starter amount will not be available during any covenant relief periods where the company elects to receive relief from certain maintenance covenants). The covenant relief period terminates on the earlier of (a) achievement of a total net leverage ratio of no greater than 4.0x or (b) March 31, 2023. Collateral leakage is permitted through the transfer of assets to unrestricted subsidiaries, subject to pro forma financial covenant compliance, and regardless unrestricted subsidiaries are prevented from owning or holding intellectual property material to the business. Guaranteeing subsidiaries must provide guarantees whether or not wholly-owned, reducing the risk of future guarantee releases. There are no leverage-based step-downs to the requirement that net asset sale proceeds prepay the loans, helping preserve lenders' control over collateral proceeds.Harsco Corporation, headquartered in Camp Hill, PA, is a diversified industrial service company focused on global markets for outsourced services to metal industries, metal recovery & mineral-based products, railway track maintenance. Inclusive of the Environmental Solutions business (ESOL) pro forma revenues for the 12 months ended September 30, 2020 totaled approximately $2.0 billion.The principal methodology used in these ratings was Environmental Services and Waste Management Companies published in April 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113573. 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.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. Griselda Bisono 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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