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Pearls (Netherlands) BidCo B.V. -- Moody's assigns B3 rating to Pearls BidCo; stable outlook

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Rating Action: Moody's assigns B3 rating to Pearls BidCo; stable outlookGlobal Credit Research - 26 Jan 2022Stockholm, January 26, 2022 -- Moody's Investors Service ("Moody's") assigned a B3 corporate family rating (CFR) and a B3-PD probability of default rating to Pearls (Netherlands) BidCo B.V. (Pearls BidCo or Caldic Group) and B2 instrument ratings to the proposed E1,000 million equivalent senior secured 1st lien term loan B (TLB) and the E155 million senior secured 1st lien revolving credit facility (RCF), both issued by Pearls (Netherlands) BidCo B.V.. The outlook is stable. Moody's expects to withdraw all ratings for Caldic Midco B.V., a subsidiary of Caldic Holdco B.V. (Caldic), once all debt issued in the Caldic's corporate family is repaid.The proposed capital structure also includes an (unrated) pre-placed E265 equivalent million second lien term loan. The proceeds from the new facilities will be used primarily to finance the purchase of Caldic Holdco B.V., repay existing debt at Caldic Investments B.V. and GTM Group (GTM), pay for transaction-related fees and finance general corporate purposes to the extent of any overfunding at the closing date. Additional sources of funding include a significant cash equity contribution from Advent International on top of the non-cash equity contribution of GTM. Moody's anticipates that the equity funding will be in the form of common equity. Pearls BidCo will become the new holding company of Caldic and GTM.RATINGS RATIONALEThe assigned B3 CFR reflects Caldic Group's very high Moody's adjusted and estimated gross leverage, on a pro-forma basis for the transaction and including the full-year contribution of Scott Chemicals, of around 7.5x for the last 12 months that ended December 2021. Moody's anticipates gross leverage to decrease to around 7x over the next 12 to 18 months driven by organic EBITDA growth, albeit entailing some execution risk related to the achievement of annual synergies, while maintaining a good liquidity profile.Caldic Group's position as one of the largest specialty chemicals-focused distributors with strong market positions in the food ingredient end-market and in Latin America; significant exposure to the resilient and higher-margin life-science end-markets (52% of estimated gross profit in 2021), such as food and pharma, with a strong focus on value-added services; capacity for solid free cash flow generation given its asset light business model; diversified customer and supplier base with long standing relationships; and its good liquidity profile support the B3 CFR.However, the CFR is constrained by Caldic Group's very high Moody's adjusted and estimated gross leverage of around 7.5x; relatively small size compared to other rated distributors with estimated revenues of around E1.7 billion in 2021; higher share of sales to the more cyclical industrial end-markets compared to some other pure-play specialty chemicals distributors; the risk of debt-funded acquisitions which limits the visibility of a sustainable deleveraging; some integration risk with regards to the planned merger of GTM and Caldic; and a limited track record of maintaining its profitability at current levels with an EBITDA margin above 10% in 2021.LIQUIDITY PROFILECaldic Group has a good liquidity profile. The estimated opening cash balance at the transaction close is around E50 million, and the company has full availability under its E155 million RCF maturing in 2028. In combination with forecasted funds from operations in the range of E90 million to E100 million over the next 12 months, these funds are sufficient to cover capital expenditure, as adjusted and defined by Moody's, of around E30 million (including lease repayments), moderate capital swings and day-to-day cash needs.The availability of the RCF is subject to a senior secured net leverage covenant of 9.45x to be tested when RCF utilization (net of cash on balance sheet) is at or above 40%. The starting senior secured net leverage is 4.7x as of end December 2021.ESG CONSIDERATIONSMoody's governance assessment for Caldic Group incorporates its highly leveraged capital structure, reflecting high risk tolerance of its private equity owners. The private equity business model typically involves an aggressive financial policy and a highly leveraged capital structure to extract value. Moody's expects debt-funded acquisitions to be a feature of the company's growth strategy.RATIONALE FOR STABLE OUTLOOKThe stable outlook reflects Moody's expectation of increasing earnings leading to a deleveraging, from its elevated starting gross leverage, to around 7x over the next 12 to 18 months while maintaining a good liquidity profile.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSPositive pressure, though unlikely over at least the next year given the current leverage, could arise if the company would become more prudent in its allocation of capital leading to a Moody's-adjusted total debt/EBITDA below 6.0x on a sustainable basis and the company continues to generate meaningful positive free cash flow.Negative pressure on the ratings could arise with evidence of inability to generate sustained positive free cash flow or deterioration of the liquidity profile, or if Moody's-adjusted total debt/EBITDA remains above 7.5x on a sustainable basis. A downgrade also would be likely if the company would face price pressure.STRUCTURAL CONSIDERATIONSThe B2 ratings on the senior secured 1st lien term loan B and the senior secured 1st lien RCF reflect their first priority claim on the security package ahead of the (unrated) second lien term loan. The senior secured facilities benefit from guarantors representing at least 80% of EBITDA in certain jurisdictions. The security package includes share pledge as well as pledges over bank accounts and intercompany receivables over Pearls BidCo and the guarantors. The security package also includes other securities, subject to customary limitations and exceptions, in certain countries, however Moody's estimates that these assets represent only a small fraction of Caldic's total assets.The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY DESCRIPTIONHeadquartered in the Netherlands, Caldic is a leading specialty chemicals and ingredients distributor with a global footprint focusing on the life-sciences and industrials end-markets. On 22 November 2021, Advent International agreed to acquire Caldic for an undisclosed amount. The transaction is expected to close during Q1 2022 after obtaining regulatory approvals. Following the acquisition, Advent intends to combine the activities of Caldic and the Latin American based chemical distributor Grupo Transmerquim S.A. (GTM), which has been owned by Advent since 2014. Pearls (Netherlands) BidCo B.V. (Caldic Group or Pearls BidCo) will be the holding company. Pro-forma for the merger with GTM and including Scott Chemicals, Caldic Group generated revenues of E1.7 billion and company-adjusted EBITDA of E184 million as of the end of December 2021.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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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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