W.R. Grace & Co.-Conn. -- Moody's downgrades W.R. Grace & Co.-Conn.'s CFR to Ba3 and assigns Ba2 rating to new term loan; outlook stable

Rating Action: Moody's downgrades W.R. Grace & Co.-Conn.'s CFR to Ba3 and assigns Ba2 rating to new term loan; outlook stableGlobal Credit Research - 23 Mar 2021New York, March 23, 2021 -- Moody's Investors Service, ("Moody's") downgraded W.R. Grace & Co.-Conn.'s (Grace) Corporate Family Rating (CFR) to Ba3 from Ba2, Probability of Default Rating (PDR) to Ba3-PD from Ba2-PD, first lien senior secured credit facility to Ba2 from Ba1 and unsecured notes to B1 from Ba3. Moody's has assigned a Ba2 rating to the proposed $300 million first lien term loan, which will be pari passu with the existing senior secured credit facility. Moody's also upgraded the Speculative Grade Liquidity rating to SGL-1 from SGL-2. The outlook is stable."The downgrade follows the announced acquisition of Albemarle's Fine Chemistry Services business and additional debt financing that will result in elevated leverage and credit metrics that were already stretched for the existing Ba2 rating," said Domenick R. Fumai, Moody's Vice President and lead analyst for W.R. Grace & Co.-Conn.Downgrades:..Issuer: W.R. Grace & Co.-Conn..... Probability of Default Rating, Downgraded to Ba3-PD from Ba2-PD.... Corporate Family Rating, Downgraded to Ba3 from Ba2....Gtd Senior Secured Bank Credit Facility, Downgraded to Ba2 (LGD2)from Ba1 (LGD2)....Gtd Senior Unsecured Regular Bond/Debenture, Downgraded to B1 (LGD5) from Ba3 (LGD6)....Senior Unsecured Regular Bond/Debenture, Downgraded to B1 (LGD5) from Ba3 (LGD5)Upgrades:..Issuer: W.R. Grace & Co.-Conn..... Speculative Grade Liquidity Rating, Upgraded to SGL-1 from SGL-2Assignments:..Issuer: W.R. Grace & Co.-Conn.....Gtd Senior Secured First Lien Term Loan , Assigned Ba2 (LGD2)Outlook Actions:..Issuer: W.R. Grace & Co.-Conn.....Outlook, Changed To Stable From Rating Under ReviewRATINGS RATIONALEThe downgrade reflects Moody's concerns that W.R.Grace's acquisition of Albemarle's Fine Chemistry Services (FCS) business for $570 million results in weaker credit metrics that have already exceeded the current threshold for the Ba2 rating. Following the acquisition of Albemarle polyolefin catalysts business, Grace's absolute debt levels have remained elevated over the last several years. In addition, the pandemic and a challenging macroeconomic environment in 2020 resulted in even weaker credit metrics. Moody's previously expected debt reduction and adjusted financial leverage to be below 4.0x within 18 months following the Albemarle acquisition in 2018. As of December 31, 2020, Grace's adjusted Debt/EBITDA was about 6.6x, interest coverage measured 3.6x and free cash flow-to-debt (FCF/Debt) was 4.2%.While Moody's anticipates Grace's results will improve in FY 2021 as refinery utilization rates continue to recover, financial performance in 2020 has underperformed expectations. The pandemic has especially affected Refining Technologies, where FCC and HPC sales sharply declined due to lower refining utilization rates and deferred change-outs, while in Materials Technologies the coatings and chemical processes sub-segments were also weak. Grace has seen sequential improvement across all segments and with the addition of FCS, Moody's expects further revenue and EBITDA growth in FY 2021. Nevertheless, credit metrics are expected to remain more commensurate with the Ba3 rating category. Moody's projects adjusted financial leverage (Debt/EBITDA), which includes a substantial underfunded/unfunded pension liability and leases, to decline towards mid-5x by the end of FY 2021; however, balance sheet debt is not expected to materially decrease over the next several years despite the expectation that annual free cash flow generation will be approximately $100 million.Grace will fund the acquisition with a combination of $300 million in an incremental term loan and a $270 million non-participating perpetual preferred equity issued out of new subsidiary that will have no payment for the first two years and 12% payment-in-kind (PIK) dividend thereafter. While Moody's gives a large amount of equity credit to the preferred equity, it is expected that Grace will redeem the preferred shares after two years using a majority of its existing cash balance and free cash flow generated over the next two years, thus limiting any meaningful debt reduction.The acquisition will add about $160 million in revenue and $60 million in EBITDA in FY 2021 on a full-year run rate basis and represents a 9.5x EV/EBITDA multiple. FCS manufactures high-value regulatory starting materials (RSMs), intermediates, active pharmaceutical ingredients (APIs) and agrochemicals. Moody's believes this complements Grace's existing pharma portfolio; however, the acquisition also introduces integration risk. Grace is already a leading supplier of silica materials and fine chemicals, and this transaction expands its Pharma & Consumer business, which is less cyclical than its Catalysts Technologies segment, to more than half of Materials Technologies' revenue. Moreover, the acquisition reduces its dependence on FCC/HPC sales that are tied to the refinery industry and face longer-term structural challenges.Grace's Ba3 rating is supported by strong market positions in several key end markets, including the leader in the global polyolefin catalyst industry and specialty silica gels, significant R&D capabilities and favorable industry prospects due to increased global environmental regulations and policies, a focus on sustainability initiatives, as well as positive demographic trends. Grace's business profile further benefits from high barriers to entry, a good operating track record with attractive EBITDA margins, and the ability to generate free cash flow through economic cycles compared to a number of comparably rated peers in the chemical industry. The rating also considers the company's good liquidity position.The rating is constrained by Moody's expectations that although leverage will decline from current levels, it will remain elevated through FY 2022 and possibly longer. The rating further incorporates Moody's view that Grace has shifted to a more aggressive financial policy, which includes a willingness to incur debt to fund strategic acquisitions and prioritize shareholder-friendly activities, and with the presence of activist investor 40 North, the company is likely to maintain an aggressive financial policy. The rating also factors modest business diversity with a significant emphasis on catalysts, though Moody's believes the recently announced acquisition and strategic tuck-ins in Material Technologies will further reduce dependence on catalysts.The SGL-1 Speculative Grade Liquidity rating indicates very good liquidity to support operations in the near term, including approximately $306 million of balance sheet cash and cash equivalents and approximately $392 million of availability under its $400 million revolving credit facility and about $40 million of availability under foreign credit facilities as of December 31, 2020.Pro forma for the transaction, debt capital is comprised of $1.25 billion (approximately $1.23 billion outstanding) first lien term loans, $400 million first lien senior secured revolving credit facility, $300 million 5.625% unsecured notes due 2024 and $750 million 4.875% unsecured notes due 2027. The Ba2 rating on the first lien term loans, one notch above the Ba3 CFR, reflects a first lien position on substantially all assets. The B1 rating on the unsecured notes, a notch below the CFR, indicates their subordination as a result of the significant amount of first lien debt in the capital structure.The stable outlook assumes that Grace will successfully de-lever over the next 2-3 years as profitability recovers and the Fine Chemistry Services acquisition is efficiently integrated contributing to additional revenue and EBITDA. Moody's also expects Grace to maintain an excellent liquidity position during the rating horizon. The stable outlook further assumes that an agreement with activist investor, 40 North, does not result in any materially adverse actions towards creditors.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade is unlikely at this time, but Moody's could upgrade the ratings with expectations for adjusted financial leverage sustained near 4.0x (Debt/EBITDA), interest coverage maintained above 6.0x (EBITDA/Interest), retained cash flow-to-debt sustained above 15% (RCF/Debt) and more balanced financial policies that include gross debt reduction. An upgrade would also assume a reduction in event risk such that the size of future acquisitions would not raise pro forma leverage meaningfully above 5.0x for a sustained period.Moody's could downgrade the ratings with expectations for adjusted financial leverage sustained above 5.0x, interest coverage below 4.0x, or retained cash flow-to-debt sustained below 10%, a significant deterioration in the company's liquidity position or a change in financial policies as a result of an unfavorable resolution with 40 North, including another large debt-financed acquisition, could also have negative rating implications.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.Headquartered in Columbia, MD., W.R. Grace & Co. is the ultimate parent of W.R. Grace & Co. -- Conn. Grace manufactures specialty chemicals and materials operating and/or selling in over 60 countries. The company has two reporting segments: Catalysts Technologies and Materials Technologies. Catalysts Technologies is a globally diversified business that includes refining, polyolefin and chemicals catalysts. Materials Technologies includes specialty materials such as silica-based and silica-alumina-based materials used in consumer/pharmaceutical, chemical processes and coatings applications. Grace generated approximately $1.73 billion of sales for the year ended December 31, 2020.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_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. Domenick Fumai 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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