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W.R. Grace & Co.-Conn. -- Moody's places W.R. Grace & Co.-Conn.'s ratings on review for downgrade

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Rating Action: Moody's places W.R. Grace & Co.-Conn.'s ratings on review for downgradeGlobal Credit Research - 02 Mar 2021New York, March 02, 2021 -- Moody's Investors Service, ("Moody's") placed W.R. Grace & Co.-Conn.'s (Grace) Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), Ba1 first lien senior secured credit facility and Ba3 senior unsecured notes ratings on review for downgrade. The SGL-2 Speculative Grade Liquidity rating is unchanged. The outlook has been changed to ratings under review (RUR) from stable."The review for downgrade follows the announced acquisition of Albemarle's Fine Chemistry Services business that further stresses credit metrics already weak for the existing rating category," said Domenick R. Fumai, Moody's Vice President and lead analyst for W.R. Grace & Co.-Conn.On Review for Downgrade:..Issuer: W.R. Grace & Co.-Conn..... Corporate Family Rating, Placed on Review for Downgrade, currently Ba2.... Probability of Default Rating, Placed on Review for Downgrade, currently Ba2-PD.... Gtd Senior Secured Bank Credit Facility, Placed on Review for Downgrade, currently Ba1 ( LGD2).... Backed Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Ba3 (LGD6)....Senior Unsecured Regular Bond/Debenture, Placed on Review for Downgrade, currently Ba3 ( LGD5)Outlook Actions:..Issuer: W.R. Grace & Co.-Conn.....Outlook, Changed To Rating Under Review From StableRATINGS RATIONALE/ FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe review for downgrade reflects Moody's concerns that the acquisition of Albemarle's Fine Chemistry Services (FCS) business for $570 million will add further stress to credit metrics that have exceeded the current threshold for the Ba2 rating. Grace's absolute debt levels have remained elevated over the last several years and a challenging macroeconomic environment in 2020 has resulted in a weaker-than-expected credit profile. Grace's adjusted Debt/EBITDA was 5.8x, interest coverage measured 4.0x and free cash flow-to-debt (FCF/Debt) of 4.9% for the last twelve months ended September 30, 2020.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. Moreover, Moody's views Grace's financial policies as more favorable towards shareholders and with the involvement of an activist investor, 40 North, likely to maintain an aggressive financial policy.Moody's review will focus on Grace's strategy to delever, including the pace of absolute debt reduction, integration of the acquisition, the company's plans regarding the preferred equity issuance, future M&A strategy and adoption of a more balanced financial policy including progress towards a successful remediation with activist shareholder, 40 North, as the standstill agreement expires at the end of March. It is unlikely that a ratings downgrade will exceed two notches.Grace will fund the acquisition with a combination of up to $300 million in an incremental term loan and a $270 million non-participating 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. The acquisition is expected to 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. Moody's estimates FY 2020 pro forma adjusted leverage will be roughly mid-6x. FCS manufactures high-value regulatory starting materials (RSMs), intermediates and active pharmaceutical ingredients (APIs) and agrichemicals. 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 presence in Pharma & Consumer, 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 rating is supported by strong market positions in several key end markets, 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 is tempered by expectations that leverage will remain elevated for the rating category. Grace's rating is further constrained by financial policies that include a willingness to incur debt to fund strategic acquisitions and prioritize shareholder-friendly activity. The rating also incorporates modest business diversity with a significant emphasis on catalysts.The SGL-2 Speculative Grade Liquidity rating indicates good liquidity to support operations in the near term, including approximately $306 million of balance sheet cash and cash equivalents and about $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.An upgrade is unlikely at this time, but Moody's could upgrade the rating with expectations for adjusted financial leverage sustained near 3.0x (Debt/EBITDA), interest coverage sustained above 6.0x (EBITDA/Interest), retained cash flow-to-debt sustained above 15% (RCF/Debt) and more balanced financial policies towards 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 4.0x.Moody's could downgrade the rating with expectations for adjusted financial leverage sustained above 4.0x, 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, including a large debt-financed acquisition, could also have negative rating implications.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 70 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.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_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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