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Journey Personal Care Corp. -- Moody's assigns B2 CFR to Journey Personal Care; outlook stable

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Rating Action: Moody's assigns B2 CFR to Journey Personal Care; outlook stableGlobal Credit Research - 12 Feb 2021New York, February 12, 2021 -- Moody's Investors Service ("Moody's") assigned a B2 Corporate Family Rating and B2-PD Probability of Default Rating to Journey Personal Care Corp. ("Journey"). Concurrently, Moody's assigned a B2 rating to the company's proposed $620 million first lien term loan. The company will also benefit from a proposed $125 million asset-based revolver (not rated) that Moody's expects will be undrawn at close. Net proceeds from the proposed term loan, in addition to $330 million of equity provided by American Industrial Partners and other investors will be used to complete the acquisition of Journey Personal Care from Domtar Corporation and pay fees and expenses. The rating outlook is stable.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Journey Personal Care Corp..... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD4)Outlook Actions:..Issuer: Journey Personal Care Corp.....Outlook, Assigned StableRATINGS RATIONALEJourney's B2 CFR reflects its relatively modest scale compared to its larger and more diversified competitors, limited operating history at current sales levels, high customer concentration and relatively high financial leverage. Pro forma financial leverage is relatively high with debt-to-EBITDA at 4.6x for the latest twelve months ending of September 2020. Moody's projects that Journey's debt-to-EBITDA will decline to roughly 4.0x over the next 12 to 18 months as it continues to grow and penetrate additional distribution channels at retail. Deleveraging will be through a combination of earnings growth and debt repayment. Nonetheless, the company faces high execution risk as it focuses on growing its relationships with its retail brand partners. Distribution losses for the company's private label brand retail customers and cost increases led to significant earnings deterioration in 2017 and 2018. That said the company's branded products, a majority of which are sold in its healthcare segments, provide some stability to earnings and cash flow. Journey's strategy will primarily focus on increasing penetration in the adult incontinence category. Other risks include successfully managing the company through an intensely competitive operating environment and event risk under financial sponsor ownership. Customer concentration with large retailers is high and pricing pressure, volume losses, or other actions necessary to support retailers can weaken cash flow. Moody's expects Journey's rate of growth to slow when the new business wins annualize. The ratings are supported by Journey's solid industry fundamentals in adult incontinence due to strong growth in the target population, projected ability to generate free cash flow, good liquidity and Moody's belief that continued distribution gains and product development will support the company's operating performance over the next 12 to 18 months.In terms of Environmental, Social and Governance (ESG) considerations, the most important factor for Journey's ratings are governance considerations related to its financial policies. Moody's views Journey's financial policies as aggressive given the use of high leverage and expected appetite for debt financed acquisitions. Social considerations also impact Journey in its adult incontinence category given positive demographic trends from growth in the target population. The stigma associated with product usage is a potential negative if it hurts product demand and prevents consumers for addressing a health issue. If incontinence is not managed well, the consumer could potentially experience feelings of rejection, social isolation, dependency, loss of control and may also develop problems with body image.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 RATINGSThe stable outlook reflects Moody's expectation that Journey will continue to operate at a relatively small scale compared to other larger consumer products issuers and have high customer concentration, but will continue to post stable revenue growth and good free cash flow. The stable outlook also reflects Moody's belief for solid demand for the company's adult incontinence products given favorable industry fundamentals.The ratings could be downgraded if Journey's revenue and EBITDA deteriorate as a result of declining market share, retail distribution losses or pricing declines. Debt funded acquisitions or shareholder distributions or a deterioration in liquidity could also contribute to a downgrade. Sustained debt to EBITDA leverage above 5.5x and EBITA to interest below 2.0x could also prompt a downgrade.An upgrade would require that the company improve its product and geographic diversity and reduce its high customer concentration. An upgrade would also require Journey to demonstrate a longer-term track record of profitable growth. Journey would also need to maintain debt-to-EBITDA leverage below 3.75x times to support an upgrade.The proposed first lien credit agreement contains provisions for incremental debt capacity up to the greater of $130 million and 100% of consolidated pro forma trailing four quarter consolidated EBITDA, plus certain additional amounts, plus unlimited first lien debt subject to a pro forma first lien net leverage requirement not to exceed 4.6x (or no worse than the existing first lien net leverage ratio if the incremental term facility is used to finance a permitted acquisition or other permitted investment). The incremental facilities will be used for working capital, capital expenditures and other general corporate purposes (including permitted acquisitions and payment of permitted dividends) of Journey Personal Care Holdings Ltd and its restricted subsidiaries. Subject to certain exceptions, the incremental debt that is a separate tranche cannot be incurred with an earlier maturity date or an earlier weighted average maturity than the remaining weighted life to maturity of the initial Term Loan. The credit agreement also permits the designation of unrestricted subsidiaries and the limitations and baskets in the negative covenants. The credit agreement requires 100% of net asset sale proceeds (with step-downs to 50% and 0% at specified leverage levels) to be used to repay the credit facility, if not reinvested within 18 months (or 24 months in the event a letter of intent or commitment letter is entered into within such 18-month period), with no reinvestment requirement. The above are proposed terms and the final terms of the credit agreement can be materially different.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.Journey Personal Care Corp. is a manufacturer and distributor of personal care products. The company develops, markets, and distributes adult incontinence and diaper products throughout the US and Europe. Journey generates nearly $1.0 billion in annual revenue and will be owned by private equity firm American Industrial Partners following the proposed purchase from Corporation.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.At least one ESG consideration was material to the credit rating action(s) announced and described above.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. 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 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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