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SCIH Salt Holdings Inc. -- Moody's assigns B3 rating to SCIH Salt's incremental 1st lien TL, new senior secured notes, Caa2 rating to new senior unsecured notes; affirms B3 CFR; outlook stable

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Rating Action: Moody's assigns B3 rating to SCIH Salt's incremental 1st lien TL, new senior secured notes, Caa2 rating to new senior unsecured notes; affirms B3 CFR; outlook stableGlobal Credit Research - 06 Apr 2021New York, April 06, 2021 -- Moody's Investors Service, ("Moody's") assigned a B3 rating to SCIH Salt Holdings Inc.'s (SCIH Salt) proposed $900 million incremental 1st lien term loan B and $1.1 billion senior secured notes and a Caa2 rating to the proposed $700 million senior unsecured notes. At the same time, Moody's affirmed the B3 Corporate Family Rating (CFR), B3-PD probability of default rating and the B3 rating of the existing $900 million 1st lien term loan. The ratings outlook remains stable.Proceeds from the incremental term loan and the notes issuance along with $993 million in new cash from Stone Canyon (parent) and MCD, a management affiliate, will be used to fund the acquisition of K+S Aktiengesellschaft's Americas salt business ("Morton Salt"), retire the $200 million 2nd lien term loan, pay for the related transaction fees and expenses and add cash to the balance sheet."The affirmation of the B3 CFR reflects Moody's views that while the $3.2 billion acquisition of Morton Salt is a leveraging event for SCIH Salt, the resulting increase in scale, expected cost synergies and earnings growth will enable the company to generate meaningful free cash flow that will be used for debt repayment and reduce leverage to levels more commensurate with a B3 rating in the next 12-24 months," said Botir Sharipov, Vice President and lead analyst for SCIH Salt.Assignments:..Issuer: SCIH Salt Holdings Inc.....Senior Secured Term Loan, Assigned B3 (LGD3)....Senior Secured Regular Bond/Debenture, Assigned B3 (LGD3)....Senior Unsecured Regular Bond/Debenture, Assigned Caa2 (LGD6)Affirmations:..Issuer: SCIH Salt Holdings Inc..... Probability of Default Rating, Affirmed B3-PD.... Corporate Family Rating, Affirmed B3....Senior Secured Bank Credit Facility, Affirmed B3 (LGD3)Outlook Actions:..Issuer: SCIH Salt Holdings Inc.....Outlook, Remains StableRATINGS RATIONALESCIH Salt's B3 CFR reflects the company's increased scale, greater geographic reach and improved operational and end-market diversification, yet constrained by high leverage and still relatively limited product diversity. The rating also factors in the significantly lower but still meaningful reliance on weather-dependent revenues which are expected to make up about 44% of the total revenues (down from more than 75%) on a proforma basis. Considering the variability in deicing salt volumes and contract pricing, Moody's expects that the evaporated and solar salt products sold to more stable industrial and consumer end-markets will, on average, account for 50-55% of the company's revenues, which will mitigate the volatility in earnings and credit metrics caused by mild winters in the Great Lakes, Great Plains, Midwest and East Coast regions. This risk is further moderated by the company's de-icing operations in Western Canada where winters are typically longer and colder, ensuring a more stable base level of demand.The addition of Morton Salt business, comprised of Morton Salt (USA), K+S Windsor Salt (Canada) and Lobos (K+S Chile) will significantly increase SCIH Salt's size, improve its product mix, consolidate relationships with existing customers and broaden its customer base. Although, as required by regulators, the company will have to divest its existing US Salt evaporated salt business within approximately 120 days after the closing of the transaction, SCIH Salt will, nevertheless, become the largest salt company in the world outside of China with 12 salt mines, 8 evaporation plants, 4 solar salt plants, 15 processing plants and 130 storage facilities located in the US, Canada and Chile. This geographic reach and the total capacity of 29 million tons of bulk, specialty and evaporated salt products position the company well to service both the coastal and inland markets in North and South America. Assuming average winter, Moody's estimates that the company will be able to generate annual revenues in excess of $2 billion.SCIH Salt has strong long-term relationships with the diversified group of government and commercial deicing salt customers, large retail, home improvement and industrial companies and is expected to hold leading positions in every salt consuming end-market it serves, including culinary, food processing, industrial, pharmaceutical and chemical industries. The company also plans to leverage Morton, Windsor and Lobos brand awareness and strong customer loyalty to capture the changing market demands for more premium specialty salts.Morton Salt's EBITDA margins averaged about 15% in 2018-2020, significantly lower than the EBITDA margins of SCIH Salt, Compass Minerals and American Rock Salt. The management team of SCIH Salt identified $190 million in SG&A, operating, processing, procurement and other cost savings the company believes could be achieved in the first full 2 years and along with additional $73 million of incremental annual cost savings, sustained over the long term. While the disparity in operating margins between Morton Salt and other producers suggests that there is a significant opportunity to reduce costs, improve productivity and efficiency, rationalize SKUs, Moody's believes that given the scale and breadth of Morton Salt's operations, the size and the high degree of the labor force unionization, SCIH Salt could face challenges during the implementation of the planned cost-cutting initiatives, which could extend beyond the initial 2-year target period and lead to a protracted integration of the new business.Morton Salt generated $212 million in adjusted EBITDA (as reported by K+S AG for the Americas unit) in the year ended December 31, 2020, while SCIH Salt generated Moody's-adjusted EBITDA of about $128 million during the same period. Excluding the US Salt's estimated LTM EBITDA of about $40m and factoring in the increased acquisition-related borrowings and Morton Salt's lease liabilities, we estimate SCIH Salt's LTM December 2020 proforma EBITDA of about $300 million and Moody-adjusted leverage of 10.9x. While starting proforma leverage is high for the rating, Moody's believes that Morton Salt's and SCIH Salt's stand-alone EBITDA reflect the near-trough LTM earnings given the mild 2019-2020 winter, competitive 2020 bid season that led to double-digit declines in bid volumes and contract prices in certain states, and the below-average winter conditions in October-December 2020 (start of the 2020-2021 winter season). Strong winter activity in February in many of the markets served by the company is likely to lead to a drawdown in government and commercial customer inventories and result in the rebound in shipped volumes and revenues during the March quarter and a more successful 2021 bid season.Assuming average 2021-2022 winter conditions, moderate volume and pricing increases during the upcoming bid season and factoring in about $100 million in savings from synergies and cost cutting measures, Moody's expects SCIH Salt's EBITDA to grow to about $425-450 million in FY2022 (September year-end). The EBITDA growth along with the increased free cash flow that is expected to be used for debt repayment should reduce Moody's adjusted Debt/EBITDA to low-mid 7 times. Over the longer-term, Moody's expects the leverage to range between 4 times and 8 times depending on winter conditions, M&A activity and the company's initiatives to increase exposure to higher-margin consumer end-markets.The stable rating outlook reflects expectations that the company will successfully integrate Morton Salt and achieve a significant portion of the targeted synergies and costs savings, leading to a substantial growth in earnings. The stable outlook assumes that the majority of the projected free cash flow will be applied to debt repayment and Moody's adjusted leverage will trend down to lower 7x over the next 12-18 months. The stable outlook also assumes that the company will continue to generate free cash flow through mild winters.By the nature of its business, i.e. deriving a considerable portion of its revenues from the underground mining of rock salt deposits, SCIH Salt faces a number of ESG risks typical for a company in the mining industry, including compliance with stringent health, safety and environmental regulations. However, the ESG risks for the company are generally lower than those of base and precious metals producers because salt mining is considered less hazardous and requires less processing (crushing and grinding). That said, the company needs to maintain good social relationships with the communities surrounding its rock salt, evaporated and solar operations. While environmental risks are moderate, social and governance risk are above average given the high degree of workforce unionization, elevated leverage and the company's private ownership.SCIH Salt will have adequate liquidity supported by over $200 million in cash on hand and $400 million revolving credit facility undrawn at close. A substantial portion of this cash is expected to be spent on cost-saving initiatives and capex investments aimed at expanding operating margins and improving cash flow generation on a sustained basis. The company's liquidity position and expected positive free cash flow should comfortably support its first lien term loan annual amortization payments of $18 million and provide cash for incremental debt repayment. Moody's expects significant quarterly cash flow variation due to the seasonality of the salt business and expects the company to generally rely on the RCF to fund the inventory build-up before collecting significant cash in the first calendar quarter of the year.The first-lien senior secured credit facilities comprised of the $400 million first lien senior secured revolving credit facility that expires in 2025, the $1.8 billion first lien senior secured term loan due in 2027 and senior secured notes maturing in 2028 are rated B3, in line with the B3 CFR, reflecting the preponderance of the first lien debt in the capital structure. First lien facilities are secured by substantially all of the assets of the borrower and guarantors (domestic subsidiaries), 65% stock pledge of the Canadian subsidiaries that generate about 30% of the revenues and will have a negative pledge restricting their ability to incur debt and liens subject to certain carveouts. The first lien term loan contains no financial covenants and has an excess cash flow sweep of 50%, stepping down to 25% and 0% if the first lien net leverage ratio is less or equal to 4.41x and 3.91x, respectively. The revolving credit facility has a springing first lien net leverage covenant of 7.17x when the revolver is drawn at 35%. The Caa2 rating of the new senior unsecured notes reflects their lower priority position in the capital structure and their effective subordination to the secured debt. The notes will be guaranteed on a senior unsecured basis by substantially all of the assets of the borrower and guarantors (domestic subsidiaries). The guarantors (US entities) accounted for 61% of combined SCIH Salt's and Morton Salt's LTM September 30, 2020 revenues and 55% of total assets.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would consider an upgrade if the company pays down debt so that in mild (trough) winter conditions leverage does not exceed 5.5x, retained cash flow to debt (RCF/Debt) is sustained above 10%, and the company maintains good liquidity and a conservative financial policy including no large debt-financed acquisitions and no significant dividend payments to the owners.Moody's could downgrade the ratings if the leverage remains elevated and does not trend down to low 7x over the next 12-18 months. The downgrade would also be considered if in mild (trough) winter conditions leverage is expected to exceed 8x and interest coverage to fall below 1.25x. Moody's could also downgrade the ratings if liquidity deteriorates, the company undertakes another large debt-financed acquisition or makes a significant distribution that will constrain its ability to maintain a credit profile appropriate for the B3 rating through mild winters.Headquartered in Overland Park, Kansas, SCIH Salt Holdings Inc. operates 12 salt mines, 8 evaporation plants, 4 solar salt plants, 15 processing plants and 130 facilities located in the US, Canada and Chile. The company is the largest salt producer of salt in the world ex. China providing de-icing, consumer and industrial salt products to a diverse group of customers. The company is owned by Stone Canyon Industries Holdings LLC, global industrial holding company with shareholders comprised of family offices, pensions and sovereign wealth funds. SCIH Salt Holdings Inc. generated about $301 million in gross revenues during the LTM ended December 31, 2020 and about $1.75 billion on a pro-forma basis.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.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. 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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. Botir Sharipov Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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