- Oops!Something went wrong.Please try again later.
- Oops!Something went wrong.Please try again later.
- Oops!Something went wrong.Please try again later.
Rating Action: Moody's changes Trinseo's outlook to negative after PMMA acquisition announcement
Global Credit Research - 17 Dec 2020
New York, December 17, 2020 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Trinseo S.A. ("Trinseo"; Corporate Family Rating at Ba3) and its subsidiary, Trinseo Materials Operating S.C.A., subsequent to the announcement that the company has agreed to acquire the PMMA business of Arkema for roughly $1.4 billion. The transaction will be financed with up to $250 million of cash and up to $1.2 billion of new debt to be issued by Trinseo; the acquisition is expected to close in mid-2021. Moody's also maintained its Speculative Grade Liquidity Rating at SGL-1. However, the outlook was changed to negative from stable.
"The PMMA acquisition will significantly expand Trinseo's EngineeredMaterials business and increase margins, but the company is paying a full multiple for this business during a pandemic induced downturn and financing the majority of the purchase price with debt," stated John Rogers, Senior Vice President at Moody's and lead analyst on Trinseo.
Ratings affirmed: ..Trinseo S.A.
.Corporate Family Rating at Ba3
.Probability of Default Rating at Ba3-PD
..Trinseo Materials Operating S.C.A.
.Guaranteed senior secured revolver and term loan to Ba2 (LGD3)
.Guaranteed senior unsecured notes to B2 (LGD5)
..Trinseo S.A. to negative from stable
..Trinseo Materials Operating S.C.A. to negative from stable
The affirmation of Trinseo's Ba3 Corporate Family Rating (CFR) reflects its size in terms of revenue and assets, significant and sustainable market positions in each of its segments, relatively stable profitability in specialty businesses and an experienced management team with a track record of conservative financial management.
The move to a negative outlook reflects uncertainty over the timeframe for a sustained recovery in the PMMA business, the impact of increasing global capacity in styrene and a roughly doubling of balance sheet debt due to the transaction. The ultimate impact of the coronavirus on key downstream markets for Trinseo's and the PMMA business' products is not certain and may not recover as quickly as currently anticipated, adding to the risk normally associated with a large acquisition that utilizes different technologies and services new market niches.
Management is taking significant actions to limit the negative impact from a credit standpoint by slashing the dividend, halting share repurchases and focusing on free cash flow generation to accelerate debt reduction after the acquisition. Trinseo also expects to generate $50 million of cost synergies over three years and an additional $25 million in synergies from converting the business to Trineso's ERP system. Trinseo's management expects to reduce unadjusted net leverage back to the mid-2x range by 2023.
Trinseo is acquiring the polymethyl methacrylates ("PMMA") and activated methyl methacrylates businesses from Arkema. PMMA is a transparent plastic used in a wide range of applications, including many that overlap with Trinseo's existing Performance Plastics business (will become part of the Engineered Material segment). The business is vertically back integrated into the monomer MMA, via a production facility in Europe and a long term cost-based contract in the US. While PMMA is normally associated acrylic sheet products, Arkema's PMMA business generates the majority of its profitability from the sale of compounded resins used in higher-value applications in auto, lighting, medical and electronics markets. The Arkema business suffers from relatively low growth in the US and Europe. Trinseo expects to generate faster growth by expanding sales into Asia.
Trinseo's Speculative Grade Liquidity rating of SGL-1 reflects excellent liquidity primarily supported by a cash balance, of roughly $300 million subsequent to the acquisition and the expectation that free cash flow will remain positive despite the slow recovery in demand in Europe. Additionally, the company has access to a $375 million revolver maturing in 2022 with $360 million of availability due to $15 million in letters of credit, and a $150 million A/R securitization that had no outstanding borrowings but was limited by collateral to roughly $127 million. The company has a springing covenant in its revolver which requires the company to maintain a pro forma first lien net leverage ratio of less than 2.0x, if greater than 30% is drawn. The company will likely have no difficulty in meeting this covenant over the next 12-18 months, assuming that the additional debt it issues to fund the acquisition is unsecured.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade to the rating is highly unlike over the next 2-3 years due to the additional debt incurred to fund the acquisition of the PMMA business. However, the CFR could be upgraded if Trinseo's businesses excluding Polystyrene and Feedstocks consistently generates EBITDA of over $450 million, balance sheet debt falls to roughly $1.5 billion and free cash flow remains above $150 million. This would also imply that leverage during the next downturn would not rise above 4x. The rating could be downgraded if leverage remains above 4.5x in 2023 or if the company fails to generate free cash flow on a sustained basis.
Environmental, social and governance (ESG) factors are important considerations in Trinseo's credit quality. The company is exposed to environmental and social risks typical for a large, diversified chemical company. The company has below average exposure to environmental liabilities as they have an indemnification from Dow (Baa2 stable) on all liabilities prior to the carve-out from Dow in 2010. However, Trinseo does have exposure to stryene, which is "reasonably anticipated to be a human carcinogen" by the US regulatory authorities. Given the size of the company's styrene operations this is a modest credit negative and increases environmental and social risk.
Moody's noted that many chemicals have received the same designation or a more severe designation - known to be a human carcinogen - with minimal impact on the chemical's use in industrial applications. The concern for styrene, and most other industrial chemicals, is that consumer behavior can be influenced by partisan public relations campaigns and non-scientific studies. In Moody's view, the largest end-use that could be at risk given this designation would be for polystyrene used in food contact applications - food packaging and disposable cups and cutlery. However, this is a small portion of Trinseo's polystyrene business (about 10%).
Recycling of plastics is a rising social risk causing many packaging and consumer productions companies to reassess their package designs and materials. Moody's believes that certian plastics like polystyrene and PVC may be deselected in these applications over time in order to increase the quality of recycled plastics. While polystyrene is easy to recycle on its own, it can significantly degrade the performance of recycled plastic when comingled with polyethylene and polypropylene.
Trinseo's governance-related risks are lower than average as it has an independent board of directors, detailed reporting requirements, management's a track record of support for a relative conservative amount of balance sheet debt (1-2x leverage at the peak of the cycle).
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.
Trinseo S.A. is the world's largest producer of styrene butadiene (SB) latex, the largest European producer of SSBR rubber (solution styrene butadiene rubber), the third largest global producer of polystyrene and a sizable producer of engineered polymer blends. Trinseo typically has revenues of $3-4 billion depending on petrochemical feedstock prices, 24 manufacturing sites around the world, and over 2,700 employees.
For 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.
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.
John Rogers Senior Vice President 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
© 2020 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 INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S 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. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT.
MOODY'S CREDIT RATINGS,ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided "AS IS" without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY'S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY'S.
To the extent permitted by law, MOODY'S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY'S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER.
Moody's Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody's Corporation ("MCO"), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody's Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody's Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and Moody's investors Service also maintain policies and procedures to address the independence of Moody's Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody's Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading "Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy."
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.