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Rating Action: Moody's affirms Flavum Holdco B2 rating changes outlook to stableGlobal Credit Research - 16 Apr 2021Frankfurt am Main, April 16, 2021 -- Moody's Investors Service ("Moody's") has today affirmed LSFX Flavum Holdco, S.L.U.'s (formerly known as Esmalglass, now operating as Altadia) B2 corporate family (CFR) and B2-PD probability of default rating. Concurrently Moody's has affirmed the B2 ratings of the senior secured revolving credit facility and the senior secured term loans (TLB) borrowed by LSFX Flavum Bidco, S.A.U.. The outlook on the ratings has been changed to stable from negative.RATINGS RATIONALEThe stabilization of Altadia's outlook reflects the company's robust performance during 2020 for Esmalglass standalone but also of the combined entity pro forma the acquisition of the tile coatings business (Rocher) of Ferro Corporation (Ba3 negative). Moody's estimates that 2020 Moody's adjusted leverage pro forma the Rocher acquisition is around 5.2x and that the company will maintain leverage well in line with our expectations for the B2 rating, despite an expected weakening of the combined entity's gross margin and significant cost related to achieving the targeted synergies from the Rocher acquisition. Despite this weakening, EBITDA margin will remain at a solid level of around 15%. The stabilization of the outlook also reflects Altadia's sizeable liquidity cushion supported by its strongly positive FCF in 2020, and Moody's expectation of continued solid FCF generation.Following the acquisition of Rocher, Altadia will be the leading company in the global tile coatings market and Moody's deems the company to be well positioned to capture underlying estimated market growth. Moody's estimates 2021 revenues for the combined entity to grow in the range of 3%-4%. However, Moody's forecasts some margin headwinds caused by higher raw material prices leading to a normalization of gross margins and significant cost in relation to realizing targeted synergies. Hence, Moody's anticipates that leverage in 2021 will increase from currently around 5.2x to above 5.5x, which is still consistent with the rating agency's requirements for a B2 rating. Altadia targets significant net synergies of around E30 million from the acquisition. At the same time costs to realize these synergies are estimated to be around E45 million. The company expects to realize E22.5 million of synergies within the first 18 months following the closing of the acquisition. Given the relative size of the acquisition, integration risks and a failure to swiftly realize targeted synergies at forecasted cost are a downside to Moody's base case. The company currently has a significant liquidity cushion to accommodate expected costs to realize synergies.Altadia's rating continues to reflect the strong global market positions in its product segments. The B2 rating also takes into account a fairly strong forecasted EBITDA margin of around 15% for the combined entity. Albeit the Rocher acquisition initially being margin dilutive. In addition, the rating considers Altadia's track record of bringing innovative products to market and a flexible cost structure with around 80% of cost being of variable nature. Furthermore, Moody's adjusted FCF/Debt is expected to be in the range of 3%-4%. In addition to a leverage commensurate with a B2 rating, the rating is constrained by a fairly narrow product portfolio with exposure to the cyclical construction sector. Raw material price fluctuations and price pressure have in the past led to margin volatility and continue to be a risk factor to Altadia's performance.ESG CONSIDERATIONSTypically for a private equity owned company Altadia's high leverage is reflective of a financial policy characterized by a high risk tolerance of the company and its sponsor. Moody's, however, notes that Altadia's owner Lonestar has contributed significant equity to the Rocher acquisition.LIQUIDITY PROFILEAltadia's liquidity profile is strong. Liquidity sources consist of around E165 million of cash on balance sheet as per February 2021 and approximately E95 million of availability under its undrawn revolving credit facility. In combination with FFO generation of around E70 million in 2021, these sources should be more than sufficient to accommodate capital expenditures of around E30 million and swings in working capital.STRUCTURAL CONSIDERATIONSThe E675 million TLBs and E95 million revolving credit facility are rated B2, in line with the company's CFR. The instrument rating reflects the dominance of these instruments in the capital structure and the fact that the RCF and TLBs share the same guarantor coverage and collateral.RATIONALE FOR THE STABLE OUTLOOKThe stable outlook on Altadia's rating reflects Moody's expectation that leverage will remain between 5x and 6x in the next 12-18 months and that the company will able to maintain EBITDA margins at around 15% while generating positive FCF.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's could consider downgrading Altadia's rating if Moody's adjusted leverage would remain above 6x and if the company's EBITDA margin would decline to the low teens both on a sustainable basis. A downgrade would also be likely if FCF becomes materially negative or there would be a substantial weakening of the company's liquidity profile.Conversely, Moody's would consider upgrading Altadia's rating if Moody's adjusted leverage would decline to below 5x and its EBITDA margin would remain above 15%, both on a sustainable basis. An upgrade furthermore would require Moody's adjusted FCF/debt consistently being in the mid-single digits.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. 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. 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