Valvoline Inc. -- Moody's assigns Ba3 rating to Valvoline's new senior unsecured notes
Rating Action: Moody's assigns Ba3 rating to Valvoline's new senior unsecured notes
Global Credit Research - 15 Dec 2020
New York, December 15, 2020 -- Moody's Investors Service, ("Moody's") assigned a Ba3 rating to Valvoline Inc.'s new $535 million senior unsecured notes expected to mature in 2031. The rating is one notch below the company's CFR rating of Ba2 reflecting the priority of the senior secured tranche of term loan debt in the capital structure. Proceeds from the debt issuance, together with cash from the company's substantial cash availability will be used to repay the existing senior unsecured notes of roughly $800 million due in 2025. The outlook on the ratings remains stable.
Assignments: ..Issuer: Valvoline Inc.
....Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD5)
RATINGS RATIONALE
Valvoline's credit profile reflects its leading market positions in retail (conventional and synthetic) passenger car lubricants, in the quick lube DIFM (Do It For Me) market, where the company is focusing its growth initiatives, and the distributor and direct installer service markets in the US. The ratings also reflect strong and relatively stable margins in this mostly recession resistant space, which is largely tied to miles driven and requirements for periodic oil changes in the auto and truck markets.
The ratings also reflect the strong Quick Lube platform that positions the company as the second leading player in the US in this fragmented market and facilitates growth through acquisitions, helping offset secular and competitive pressures in the other two segments over time. The Quick Lubes segment is expected to account for more than half of EBITDA in 2021 as the company grows its store count and possibly same store sales as well. The company is targeting 140-160 annual store growth consisting of new stores to be built, growth in franchise stores and stores acquired through M&A transactions; M&A and capex are expected to be higher in 2021 and over the medium term. Already in 1Q21 the company has acquired 54 stores (including 27 former franchise stores) in six transactions for $162 million. In addition, the company recently closed on another acquisition for 27 stores. Of the 27 locations, 15 will be company-owned and 12 will be franchise-owned and operated.
The Core NA and International segments benefit from the growing share of synthetic oils in new vehicles, but competition in these products is against larger more entrenched competitors. Moreover, the Core NA segment at times faces highly competitive promotional activities from private label brands, as was the case through much of 2019, putting pressure on volume and price. Secular risks include the longer term growth trend in electric vehicles (EVs) which use little or no motor oils, although this trend is longer tail in nature.
The company achieved EBITDA of $510 million in 2020, up 7% yoy reflecting moderating promotional pressure from private label competition, Quick Lubes store growth, cost reduction efforts and lower base oil costs due to lower oil prices earlier in the year.
As of 30 September 2020, Valvoline's credit metrics appear stressed for the rating with Moody's adjusted gross leverage (Debt/EBITDA) of 4.6x and Retained Cash Flow/Debt (RCF/Debt) of 16.8%. However, 'net' debt/EBITDA is in the mid 2x range, which Moody's emphasizes for now recognizing the temporary spike by Valvoline (and many other companies) in debt and cash to shore up liquidity during COVID. The ratings anticipate that the high cash balances and free cash flow post-pandemic will eventually be used to restore gross debt leverage to the low-to-mid 3.0x range as the crisis pressure subsides. The company recently guided to 2021 EBITDA of $560-$580, helped by store count growth and installer channel recovery in the Core NA segment, also supporting a favorable outlook for leverage metrics.
Moody's expects Valvoline to maintain strong liquidity during and beyond the COVID crisis including substantial balance sheet cash of roughly $760 million at Sept 30, 2020. There are no outstanding borrowings under the $475 million secured revolver and the revolver is at its full availability as the company was able to repay the borrowings using net proceeds from the $400 million bond offering in May and cash and cash equivalents on hand. Also, Moody's expects modest free cash flow from operations, despite the continuous pressure on EBITDA from the COVID crisis. Maintenance covenants on the revolver include a Net Leverage test (maximum 4.5 times) and coverage test (minimum 3.0 times) with ample cushion expected on a one year forward basis. The company also has access to a $175 million ($88 million outstanding) accounts receivable securitization facility with $79 million of remaining borrowing capacity based on the availability of eligible receivables as of September 30, 2020. There are no near-term facilities with outstanding balances as of September 30, 2020.
The most significant ESG issue stems from the longer term trend in electric vehicles (EVs), which use far less engine lubes than conventional internal combustion engine (ICE) vehicles and represent a long term headwind to demand for Valvoline's products. However, significant penetration by EVs is likely still many years away, and the total global count of existing vehicles, which will continue to grow and require periodic oil changes, will remain substantially larger than new vehicle sales for decades to come. Social issues, while high profile given the connection with the transportation space and its carbon footprint, are still viewed as only modest due to the very long tail that lube products are expected to sustain, albeit against secular demand pressure. Moody's regards the coronavirus outbreak as a social risk under the ESG framework given the substantial implications for public health and safety. The 'essential' designation of Valvoline's services by local governments during the pandemic is a positive factor, as the company has been able to maintain its operations and continue to serve its customers during this period. As a public company, governance issues for Valvoline are also viewed as modest and are supported by what has thus far been adherence to conservative financial policies
The stable outlook anticipates leverage remaining at or below 3.5x and RCF/Debt to remain near or above 20% for the foreseeable future, excluding the impact from additional acquisitions. The ratings also anticipate small to moderate bolt-on acquisitions that do not spike leverage substantially above 3.5x on a sustained basis, or with a delayed recovery in leverage following larger acquisitions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Prospects for an upgrade are currently limited given the pressure on earnings from the COVID crisis, as well as the importance of M&A in Quick Lubes segment growth. However, successful execution in profitable store growth and overall margin stability and expansion could eventually support a higher rating if adjusted leverage were to sustainably fall below 2.5 times. Moody's could consider a downgrade if adjusted gross leverage is not restored closer to 3.5 times or if retained cash flow to debt falls below 10%, on a post COVID sustained basis; or due to a shift in financial policies, poor performance, aggressive share repurchases, or if acquisitions cause leverage to spike meaningfully above 3.5x with delayed recovery.
Valvoline Inc., headquartered in Lexington, Kentucky, is a marketer of premium-branded automotive and commercial lubricants. The company sells its products through over 50,000 retail outlets and about 1,432 franchised and company-owned stores. Its three business segments are Core North America (41% of sales), which includes "Do-It-Yourself" (DIY), "Do-It-For-Me" (DIFM), and commercial and industrial (C&I); Quick Lubes (37% of sales); and International (22% of sales), which includes passenger and heavy duty branded products sold to about 140 countries outside the US and Canada. The company has revenues of over $2.4 billion for FY2020.
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 DISCLOSURES
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.
Joseph Princiotta 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
© 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.
