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Univar Solutions Inc. -- Moody's upgrades Univar Solutions to Ba2 from Ba3

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Rating Action: Moody's upgrades Univar Solutions to Ba2 from Ba3Global Credit Research - 26 Apr 2021New York, April 26, 2021 -- Moody's Investors Service, ("Moody's") upgraded the Corporate Family Ratings (CFR) of Univar Solutions Inc. (Univar Solutions) to Ba2 from Ba3. Moody's also upgraded the senior secured term loans ratings to Ba2 from Ba3, and the senior unsecured rating to B1 from B2. The upgrades reflect improving operating performance, strengthening metrics supported by divestitures and debt reduction, portfolio streamlining, and cost reduction efforts since the acquisition of Nexeo Solutions, LLC (Nexeo Solutions) roughly two years ago. The outlook on the ratings remains stable. The Speculative Grade Liquidity Rating remains SGL-2."Metrics are expected to improve further as EBITDA benefits from recovery in business activity in key end markets and as debt is reduced further in 2021," according to Joseph Princiotta, Moody's SVP and senior analyst covering Univar Solutions. "The company is committed to reducting net debt by $400 million this year and expects unadjusted net leverage to improve below 3x by year end," Princiotta added.Upgrades:..Issuer: Univar Solutions Inc..... Corporate Family Rating, Upgraded to Ba2 from Ba3.... Probability of Default Rating, Upgraded to Ba2-PD from Ba3-PD....Senior Secured Term Loan, Upgraded to Ba2 (LGD4) from Ba3 (LGD4)....Senior Unsecured Regular Bond/Debenture, Upgraded to B1 (LGD5) from B2 (LGD5)Outlook Actions:..Issuer: Univar Solutions Inc.....Outlook, Remains StableRATINGS RATIONALESince the $1.8 billion acquisition of Nexeo Solutions just over 2 years ago and the subsequent divestiture of Nexeo Plastics for $667 million, Univar Solutions has reduced costs and streamlined its portfolio and is using the proceeds from asset sales to reduce debt and improve metrics. The company reports to have reduced costs by $76 million at year end 2020 of the total $120 million Nexeo-related synergy target, with the balance expected to be achieved by year end 2021. Synergy costs of $225 million, offset by $100 million in expected real estate sales proceeds, remain on track with the final roughly $70 million left to be spent this year.As part of its Streamline 2022 (S22) program, the company has announced it expects to achieve divestitures totaling roughly $240 million, which together with free cash flow will be used to reduce net debt by $400 million in 2021, helping to improve net leverage below 3.0x by year end (which roughly corresponds to Moody's gross adjusted leverage of 3.7x). Univar Solutions expects to achieve an adjusted EBITDA margin of 9.0% on a run rate basis by the end of 2022, supported by further cost reduction and economies from volume growth as volumes in key industrial, chemical and energy end markets continue to recover. Once Univar achieves its leverage and margin goals we expect the priority use of cash flow to shift to bolt-on acquisitions and to be returned to shareholders.Univar Solutions' credit profile is supported by leading market share in North America, large market share in Europe and the rest of the world, operational diversity and scale providing a strong competitive position. Moreover, the combination of Univar with Nexeo Solutions created a global leading distribution company with $8.3 billion in revenues for the December 31, 2020 period. The transaction continues to be viewed as a good strategic fit with business profile benefits, improved operational scale and footprint, enhanced market positions in specialty chemicals and ingredients, and realized and prospective acquisition synergies and IT upgrades, which were among Nexeo's strengths.Offsetting factors to Univar Solutions' credit profile include challenges to organic topline and margin growth beyond the robust recovery that's taking place this year, and a historically active bolt-on acquisition strategy that may occasionally stress leverage. Margins are inherently modest in the distribution sector but Univar Solutions shows good potential to achieve the 9% target putting it in line with other leaders in the industry.ESG CONSIDERATIONSEnvironmental, social and governance factors are relevant to Univar Solutions' credit quality, but the company is less exposed to future environmental risks typical for commodity chemical companies as chemical distributors do not use or manufacture hazardous and potentially toxic intermediates or finished products. However, legacy exposure to environmental sites is high for a distribution company, with environmental reserves associated with 107 currently or formerly owned or operated sites and 20 non-owned sites of $79.6 million at 31 December 2020. Environmental payments were $16.1 million in 2020, roughly unchanged compared to 2019 and not expected to be a meaningful drain on annual cash flow.Social risks are not serious but include asbestos related lawsuits stemming from a 1986 transaction wherein Univar Solutions acquired McKesson Chemicals Company, providing indemnification related to asbestos and other exposures. Asbestos cases peaked at about 16,000 cases in Mississippi, but no new cases have been filed in the last 10 years, and about 180 cases in 12 other states. The company has not recorded a reserve for asbestos liabilities.Governance considerations and financial policy decisions are important to the ratings. As a publicly traded company Univar Solutions has transparent and disciplined governance and financial policies, as evident by the use of equity in the financing of the Nexeo acquisition, the use of proceeds from the Nexeo plastics divestiture to reduce debt; and its public commitment to reducing debt and achieve reasonable leverage targets.Univar Solutions' SGL-2 speculative grade liquidity rating reflects its good liquidity as of 31 December 2020, supported by $387 million of balance sheet cash and about $470 million of availability under the company's ABL credit facilities. Univar Solutions will have positive free cash flow in 2021 and together with proceeds from asset sales are expected to support the company's $400 million net debt reduction target. The ABL and term loans do not contain financial maintenance covenants; the ABL has a debt incurrence test if availability falls below 10%. The term loans are secured by a first priority lien on all tangible and intangible assets and a second priority lien on working capital.The stable outlook assumes that Univar Solutions will continue to deliver synergies through integration, use proceeds from asset sales to reduce net debt by an additional $400 million this year, and make further progress with SAP migration outside the US. The stable outlook also anticipates that Univar Solutions will achieve or exceed its leverage target of 3.0x by year end (on a net, unadjusted basis, which currently corresponds to about 3.7x on a Moody's gross adjusted basis).FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would be unlikely to consider an upgrade given the company's current financial policies and net leverage target of 3.0x (gross adjusted leverage of 3.7x) and the company's intent to resume M&A activity and shareholder renumeration once its leverage target is achieved. However, Moody's would consider an upgrade if policies become more conservative and gross adjusted leverage were to decline towards 3.0x and retained cash flow to debt were to rise above 20%, both on a sustained basis.Moody's would consider a downgrade if EBITDA margins were to trend negatively or if gross adjusted leverage were to rise above 4.0x on a sustained basis, or if free cash flow or liquidity were to materially decline.Univar Solutions Inc. is one of the largest global chemical and ingredient distributors and providers of related services, operating hundreds of distribution facilities to service a diverse set of customers end markets in the US, Canada, Europe, the Middle East, Latin America and the Asia Pacific region. Univar Solutions' top 10 customers account for roughly 6% of sales, while its top 20 suppliers represent roughly 40% of its total chemical expenditures. For the 12 months ended December 31, 2020, the publicly-traded company generated approximately $8.3 billion in revenue.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. 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_1263068.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. Joseph Princiotta 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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