Rating Action: Moody's assigns B2 CFR to Intelligent Packaging Limited Finco Inc.; outlook is stable
Global Credit Research - 21 Aug 2020
$450 million of rated debt
Toronto, August 21, 2020 -- Moody's Investors Service ("Moody's") assigned ratings to Intelligent Packaging Limited Finco Inc. ("IPL Finco"), consisting of a B2 corporate family rating (CFR), B2-PD probability of default rating and a B3 rating for its $450 million senior secured notes. The outlook is stable. This is the first time Moody's has assigned ratings to the company.
Madison Dearborn Partners ("MDP") has entered into an agreement to acquire IPL Plastics Inc. ("IPL Plastics") as part of a take-private transaction. The transaction will be structured with Intelligent Packaging Sub LP as the parent holding company of IPL Plastics and IPL Finco. Intelligent Packaging Sub LP will also act as the guarantor for the debt obligations issued by IPL Finco. MDP is currently in the market seeking to raise $450 million of senior secured notes. The proceeds from the senior secured notes, along with MDP's equity injection, will be used to partially fund the acquisition and refinance all existing debt at IPL Plastics.
..Issuer: Intelligent Packaging Limited Finco Inc.
.... Corporate Family Rating, Assigned B2
.... Probability of Default Rating, Assigned B2-PD
....Senior Secured Regular Bond/Debenture , Assigned B3 (LGD4)
..Issuer: Intelligent Packaging Limited Finco Inc.
....Outlook, Assigned Stable
Intelligent Packaging Limited Finco Inc.'s B2 rating is constrained by: (1) relatively small scale (adjusted EBITDA about $90 million); (2) pro-forma leverage (adjusted debt/EBITDA) of 5.7x at transaction close and our expectation that the metric will remain elevated above 5x over the next 12 to 18 months; (3) the fragmented and competitive nature of the plastics packaging industry with low organic growth; (4) moderate environmental risks related to the use of plastics in the manufacturing process; and (5) exposure to raw material costs which is partially mitigated by pass-through pricing for its products.
However, IPL Finco benefits from: (1) a diversified business model through three main business segments with geographical diversification; (2) high exposure to relatively stable end markets including food packaging, environmental solutions and agricultural consumers; (3) diverse long-term customer relationships which include a number of large retailers and food manufacturers; (4) strong market positions in Canada and the UK supported by IPL Plastics' ability to customize its end products for its customers; and (5) good liquidity.
IPL Plastics has good liquidity. The company's sources of liquidity are approximately $180 million while it does not have any mandatory repayments on the senior secured notes over the next 12 months. IPL Plastics' liquidity is supported by cash of approximately $30 million at the closing of the transaction, full availability under its $125 million ABL revolver due September 2025 (subject to a borrowing base), and our expected free cash flow around $25 million through the next 4 quarters. IPL Plastics does not have to comply with any financial covenants unless ABL availability falls below 10% of the lesser of the borrowing base and the commitment amount, which mandates compliance with a minimum fixed charge coverage ratio of 1x. We do not expect this covenant to be applicable in the next 4 quarters. IPL Plastics has limited ability to generate liquidity from asset sales as its assets are encumbered. IPL Plastics has no refinancing risk until 2025 when its ABL facility will come due.
IPL Finco's stable outlook reflects Moody's view that it will maintain its leverage above 5.0x as supported by the recovery of the LF&E and RPS segments in 2021 post coronavirus. We also expect IPL Finco to generate strong free cash flow over the next 12 to 18 months, which could lower its leverage through debt repayment.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be upgraded if IPL Finco sustains adjusted Debt/EBITDA below 5.0x (pro forma 5.7x at transaction close), EBITDA/Interest above 3.5x (pro forma 3.0x at transaction close) and FFO/Debt above 12.5%, or if IPL Plastics undergoes a significant expansion in its scale and diversification of its operations.
The rating could be downgraded if IPL Finco sustains adjusted Debt/EBITDA above 6.0x (pro forma 5.7x at transaction close) and EBITDA/Interest below 2.5x (pro forma 3.0x at transaction close), or if liquidity weakens materially, or if FFO/Debt is sustained below 10% (pro forma 12.5% at transaction close).
As a plastic packaging manufacturer, IPL Plastics has moderate environmental risks given increasing regulatory and consumer concerns about plastic packaging. However, the concerns have revolved primarily around single-use plastics which are not the focus of IPL Plastics' business. IPL Plastics' products are mostly recyclable and the company has worked with its global brand customers to achieve their required recyclable plastics content ahead of their 2025 commitments. Having said that, IPL Plastics' business model is exposed to innovation of alternative packaging materials which could potentially replace plastic packaging in the future, which could affect IPL Plastics' volumes. However, this risk is currently considered low as the alternative to plastics remain inefficient in terms of energy usage and amounts of alternative materials required to replace the amount of resin materials needed for plastic packaging. Overall, the company has shown the willingness and ability to innovate and adapt to its customers' requirements which helps mitigate the environmental risks it faces in the long run.
IPL Plastics is also moderately exposed to social risks as they relate to the impact from the coronavirus outbreak. One of the end markets that IPL Plastics serves is the food services industry which has seen significant disruptions due to the closures of restaurants, which has negatively affected IPL Plastics' LF&E segment in North America. IPL Plastics is also exposed to the demand for automotive and event flooring products through their RPS division, which has been afflicted by the pandemic.
The governance considerations we make in IPL Plastics' credit profile include the private-equity ownership and the potential for an aggressive capital structure in comparison to public corporations. We also considered the reduced financial disclosure requirements for a private company in comparison to a publicly-traded entity.
The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass, and Plastic Containers published in May 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1120393. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
IPL Finco is a subsidiary of Intelligent Packaging Sub LP, which also owns IPL Plastics, a provider of plastic packaging solutions and manufacturer of specialty rigid packaging products used in the food, consumer, agricultural, logistics and environment end markets. IPL Plastics markets customized injection molded containers and lids as well as large plastic containers for various retail and industrial customers. Revenues for the twelve months ended June 30, 2020 was $589 million. IPL Finco's debt obligations are guaranteed by Intelligent Packaging Sub LP and its subsidiaries.
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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