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LSFX Flavum Holdco, S.L.U. -- Moody's affirms Flavum Holdco B2 rating changes outlook to stable

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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. 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 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. 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Moritz Melsbach Asst Vice President - Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany 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 Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 © 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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