Rating Action: Moody's changes Keter's outlook to stable from negative
Global Credit Research - 01 Sep 2020
Stockholm, September 01, 2020 -- Moody's Investors Service ("Moody's") has today changed the outlook to stable from negative and affirmed the Caa1 corporate family rating (CFR) and Caa1-PD probability of default rating (PDR) of Keter Group B.V. (Keter). Concurrently, Moody's has affirmed the Caa1 senior secured term loans B (TLB) and revolving credit facility (RCF).
The rating action reflects the significant improvement in operating performance and liquidity profile in the first half of 2020 and Moody's expectation that credit metrics will continue to improve. A sustained improvement of credit metrics and positive free cash flow (FCF) generation could support further positive rating pressure over the next quarters.
The outlook change is driven by the significant improvement in operating performance of Keter in the first half of 2020 despite the disruption caused in March and April by the coronavirus pandemic. EBITDA margin improved significantly supported by a favorable shift in product mix, SKU rationalization, lower raw material prices and operational and cost saving initiatives. The company also benefited from a strong rebound in demand following the gradual phase-out of lockdowns, which was contributed by the limited traveling and out-of-home leisure options that consumers faced. As a result the company posted an EBITDA growth of over 100% during June and July which in turn allowed the company to outperform its EBITDA budget as of July 2020 while YTD reported EBITDA was up 28% versus the same period last year. While Moody's believes that the consumer spending pattern will gradually return to more normalized levels over the next 12-18 month, Moody's also expects the company to continue to benefit from the recent trend, albeit with moderating growth. As such Moody's adjusted leverage is expected to decline to below 8.0x in 2020 and to below 7.5x in 2021. The improvement in profitability, coupled with tighter working capital management and lower capital spending, has also significantly improved the company's free cash flow generation which Moody's expect to be around E50-60 million in 2020.
That said, the ratings remain constrained by the high leverage, leaving the company more vulnerable to end market weaknesses or operational challenges, especially in the current uncertain environment. The historical margin volatility due to the significant exposure to polypropylene prices also remains a key risk to the business and could slow the deleveraging pace. Nevertheless, Moody's recognizes the business turnaround since late 2019 and positive momentum in the first half of 2020. The volatility in raw material prices is also in part mitigated by the company's further usage of regrind as well as a number of recent resin purchases at favourable prices. Therefore a continued improvement in credit metrics could lead to further positive rating pressure in the coming quarters.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Governance considerations factored into the rating include the company's aggressive financial strategy, characterized by the highly levered capital structure and debt funded acquisitions back in 2017 and 2018. At the same time Moody's recognizes the supportive shareholder structure, evidenced by the equity injection in 2017 and 2018. Moody's notes that historical differences in management financial reporting from the audited accounts create a certain level of risk when accessing interim financial metrics. However the company stated that going forward the reporting will be more aligned with the reporting of the audited accounts.
The secured credit facilities form the vast majority of Keter's gross indebtedness and so the rating of both the TLB and RCF is Caa1, in-line with the CFR. While Moody's notes the presence of a PIK instrument outside of the restricted group (the immediate parent of the highest level company in the restricted group capitalises its ownership of Keter via common equity), Moody's treats this instrument as equity for the purposes of its debt and leverage calculations.
Moody's considers Keter's liquidity profile to be adequate following a significant improvement in FCF generation supported by the substantial reduction in inventory and increase in profitability. As of July 2020 the company had around E65 million of cash on balance sheet and access to the fully available E110 RCF. Additionally, the company had E26 million available under its E31 million credit facility secured by trade receivables and inventory, maturing in December 2021, and around E50 million available under its non-recourse factoring lines. Moody's notes that the company's FCF remains constrained by the high interest costs, working capital seasonality and moderate capital spending needs. Keter also has around E65 million of uncommitted short-term loans with local banks that will continue to constrain its liquidity profile. However Moody's recognizes that the improved cash position, if sustained, could reduce the company's reliance on these bank lines. The springing covenant test was renegotiated for June 2020 to March 2021 with a minimum EBITDA (without proforma savings) of E80 million and minimum cash at the end of each month of E20 million. Moody's expects the company to be compliant under both tests during the period. Moody's notes that the RCF and the TLB matures in 2022 and 2023 respectively. Therefore, refinancing risks could increase if the performance improvement is not sustained. Moody's expects the company to proactively address upcoming maturities.
The stable outlook reflects Moody's expectation that credit metrics will continue to improve over the next 12-18 months with Moody's adjusted leverage expected to be below 7.5x by year-end 2021. Moody's also expects the liquidity to remain adequate over the period.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Positive rating pressure could arise in the next quarters if the deleveraging pace towards 7.0x is faster than Moody's expectation; FCF generation remains positive and the liquidity improvement is sustained.
Negative rating pressure is unlikely in the near term, but could arise if Moody's-adjusted gross debt/EBITDA starts to increase; negative FCF generation for a sustained period with weakening liquidity profile.
The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Keter Group B.V. (Keter) is a holding company, based in the Netherlands, for a group of entities involved in the manufacturing and distribution of a variety of resin-based consumer goods. Keter's key products include garden furniture and home storage solutions. Keter is majority owned by funds advised by Private Equity firm -- BC Partners -- while minority shareholders include funds advised by Private Equity firm PSP and the original founders, the Sagol family. In 2019 Keter Group reported EUR 1.2 billion of 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.
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.
Nathalie Tuszewski Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service (Nordics) AB Norrlandsgatan 20 Stockholm 111 43 Sweden JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Christian Hendker, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service (Nordics) AB Norrlandsgatan 20 Stockholm 111 43 Sweden JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
© 2020 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 INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S 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. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.