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Valvoline Inc. -- Moody's assigns Ba3 rating to Valvoline's new senior unsecured notes

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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

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