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Polymer Additives, Inc. -- Moody's upgrades Polymer Additives' (Valtris) ratings to Caa1; outlook stable

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Rating Action: Moody's upgrades Polymer Additives' (Valtris) ratings to Caa1; outlook stableGlobal Credit Research - 08 Apr 2021New York, April 08, 2021 -- Moody's Investors Service ("Moody's") has upgraded Polymer Additives, Inc.'s (d/b/a Valtris Specialty Chemicals) Corporate Family Rating (CFR) to Caa1 from Caa2, it's Probability of Default Rating (PDR) to Caa1-PD from Caa2-PD, as well as the company's senior secured first lien revolver and term loan to Caa1 from Caa2. The outlook has been changed to stable from negative."The rating upgrade is supported by a brighter macroeconomic outlook, recovering manufacturing activities and Valtris' improving earnings and credit metrics in 2021 from their pandemic lows of 2020," says Jiming Zou, a Moody's Vice President and Senior Analyst for Valtris.Upgrades:..Issuer: Polymer Additives, Inc.....Corporate Family Rating, Upgraded to Caa1 from Caa2;....Probability of Default Rating, Upgraded to Caa1-PD from Caa2-PD;....Senior Secured First Lien Revolving Credit Facility, Upgraded to Caa1 (LGD4) from Caa2 (LGD4)....Senior Secured First Lien Term Loan, Upgraded to Caa1 (LGD4) from Caa2 (LGD4)Outlook Actions:....Outlook, Changed to Stable from Negative.RATINGS RATIONALEDemand for polymer additives such as plasticizers, stabilizers and lubricants has been improving thanks to strong end markets and restocking needs, as the vaccination rolls out and businesses reopen. Demand for polymer additives is generally in line with GDP, given their primary application in PVC, as well as other polyolefin and rubber products, which in turn are driven by applications in building, transport, packaging, electric and healthcare. Moody's expects the stronger demand will help Valtris increase product prices to offset raw material cost inflation, with its 2021 EBITDA likely matching the pre-pandemic level of 2019.The Caa1 rating reflects that the company's credit metrics will remain weak, despite the expected improvement. Based on our estimates and including Moody's analytical adjustments, Valtris' debt to EBITDA ratio will be close to mid-7x and interest coverage between 1.5x-2.0x. The higher working capital needs to cover raw material price inflation will leave no free cash flow for debt reduction and may require drawdown from the revolver this year. While earnings recovery will improve Valtris' financial flexibility, covenant compliance continues to weigh on its credit profile given the incomplete economic recovery in 2021 and Valtris' vulnerability to adverse changes in the operating environment.Valtris' liquidity sources include its cash on hand and the availability under its $60 million revolving credit facility, which will be sufficient to cover working capital needs in the next 12 months. The majority of the revolver remains available. The company has to comply with a springing first-lien net leverage covenant of not exceeding 7.85x, if more than 35% (or $21 million) of the revolver is drawn. The company drew down the entire $60 million revolver out of precaution at the height of the pandemic and subsequently repaid almost all of the drawn amount at the end of 2020. A deterioration of its reported EBITDA towards about $50 million would increase the risk of covenant breach.Valtris has a broad range of polymer additives, including plasticizers, stabilizers and lubricants based on a variety of raw materials including toluene, soybean oil and tallow. Its earnings were negatively affected by a demand reduction in certain end markets, particularly transportation and building products, while demand for medical and sanitation applications remained strong during the pandemic.Valtris' rating is supported by its leadership in niche applications such as bio-based plasticizers and environmentally friendly fast-fusing plasticizers, that will show stronger growth. Its business profile is also backed by a broad customer base, geographic diversification, and entrenched customer relations. The acquisition of INEOS' businesses, including esters, chlorotoluenes and derivatives, in 2018 expanded the company's revenues base and its product offerings with environmentally friendly esters plasticizers and offer growth opportunities in benzyl alcohol and derivatives.The company's rating has also factored in environmental, social and governance considerations. Government regulations on phthalate plasticizers due to their perceived health hazards will continue to impact the sales of certain Valtris products such as butyl benzyl phthalate plasticizers (BBP), while offering growth opportunities in environmentally friendly plasticizers. The ownership by a private equity firm has constrained Valtris' credit profile given the aggressive debt leverage and debt-funded acquisitions.The stable outlook reflects Moody's expectation that credit metrics will remain adequate for the rating and management will carefully manage liquidity in the next 12-18 months.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would consider upgrading the ratings if the company improves its debt leverage sustainably below 7.0x and improves its liquidity profile. Conversely, the ratings could be lowered if earnings fail to improve or liquidity deteriorates with negative free cash flow or increased risk of covenant breach.The 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.Polymer Additives, Inc., d/b/a Valtris Specialty Chemicals, is a manufacturer of a diverse set of polymer modifiers, lubricants, and stabilizers primarily used as additives in the production of plastics. Valtris is owned by H.I.G. Capital LLC, which purchased Valtris as the majority of the assets associated with Ferro Corporation's Polymer Additives Division in December 2014. In 2018, Valtris acquired certain businesses from Ineos Group Holdings S.A. Valtris generated about $600 million in sales in 2020.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.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. Jiming Zou, CFA Vice President - Senior Analyst 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 Glenn B. Eckert 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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