Fitch Ratings has downgraded Ardagh Metal Packaging S.A.'s (AMP) Long-Term Issuer Default Rating (IDR) to 'B-' from 'B'.

The Outlook is Negative. A full list of rating actions is below.

The downgrade of AMP follows the downgrade of its parent Ardagh Group S.A. (Ardagh; CCC). The IDR reflects Fitch's view that AMP's rating can be up two notches above that of Ardagh, reflecting AMP's higher standalone credit quality and the 'porous' ring-fencing of AMP's capital structure as well as 'porous' access & control linkages under Fitch's Parent and Subsidiary Linkage Rating Criteria (PSL Criteria).

Fitch has also revised AMP's Standalone Credit Profile (SCP) to 'b' from 'b+' which is still stronger than Ardagh's IDR of 'CCC'. The SCP revision is driven by further delay in deleveraging due to weaker free cash flow (FCF) generation. The SCP also reflects a leading market position in metal beverage packaging, long-term partnerships with customers, geographical diversification, and historically good profitability.

The Negative Outlook reflects AMP's link to under-performing Ardagh as well as possible deterioration in AMP's SCP.

Key Rating Drivers

Weaker Performance: AMP's operating performance in 2023 was weaker than we expected with EBITDA leverage at 8.0x (versus our 7.5x forecast) as a result of lower EBITDA generation and higher utilisation of factoring, which we incorporate into the debt quantum. Our updated rating case incorporates significantly lower Fitch-defined EBITDA in 2024 versus our previous forecast, resulting in delayed deleveraging with EBITDA leverage expected at 7.8x at end-2024 and 6.7x at end-2025. This is above that of many peers in the 'B' rating category and further deleveraging delay could result in a downgrade.

Profitability to Improve in 2025: While we do not expect material recovery in EBITDA margin in 2024 we still anticipate a rebound in profitability from 2025. We forecast EBITDA margin to reach 11.3% in 2025 and about 12.5% in 2026. The improvement is expected to stem from better cost management following substantial capex and from savings accrued from shutting down an older inefficient Ohio plant in the US, as well as steel lines at a German site. AMP's ability to transfer a majority of costs to its customers contractually will also bolster margins.

FCF Still Negative: Lower-than-expected EBITDA will erode AMP's FCF generation. We continue to forecast significant reduction in total capex in 2024 to about USD230 million from USD379 million in 2023. However, this will not offset weaker EBITDA generation. We conservatively forecast capex at around USD210 million-USD220 million per year during 2025-2027. Together with expected dividend payments of about USD240 million per year and annual dividends on preferred shares of USD24 million, we expect FCF to turn marginally positive only in 2027.

SCP Still Stronger than Parent's: We continue to view AMP's SCP as stronger than Ardagh's. However, Fitch has revised AMP's SCP down to 'b' from 'b+' due to increased leverage and a prolonged stretch of negative FCF. Despite this revision, AMP's SCP continues to be underpinned by its market leadership, extensive geographic spread, exposure to stable, non-cyclical markets, sustainable demand, longstanding customer relationships, and contractual cost pass-through provisions.

Ardagh Controls Stronger AMP: Using our PSL Criteria, we have taken the stronger subsidiary-weaker parent approach to assess AMP. Ardagh, as AMP's majority (76%) shareholder, controls AMP's strategic decisions, with significant governance overlap in the board of directors. Ardagh also provides AMP with services including IT, financial reporting, insurance and risk management, and financing and treasury management via long-term service agreements. We now view access and control links as 'porous' (previously 'open'), reflecting the presence of minority shareholders in AMP (24% stake is free-float) and their potential influence on strategic decisions.

Constrained Two Notches Above Ardagh's: AMP's debt financing is separate from Ardagh's, with no cross-guarantees or cross-default provisions and with separate security and documentation ring-fence packages. However, we view AMP's financing documentation as providing only limited efficacy caps on cash outflows, which may be further tested by Ardagh's increasing refinancing risk. We continue to view AMP's legal ring-fencing as 'porous'. This, in combination with 'porous' access and control, enables AMP's IDR to be two notches above that of Ardagh.

Solid Global Market Position: AMP is among the largest global metal beverage can producers with exposure to stable end-markets. It benefits from high operational flexibility through its global network of manufacturing facilities that are located close to its customers. Its market position, long-term partnership with customers, and capital-intensive business act as moderate-to-high entry barriers. The non-cyclical beverage end-market provides AMP with sustainable revenue over the long term, with increased environmental awareness supporting demand for metal beverage cans.

Preferred Shares Equity Treatment: AMP's Fitch-defined debt includes a perpetual instrument, with an ability to defer its 9% annual preferred dividend. We have assigned 50% equity credit to the instrument using our Corporate Hybrids Treatment and Notching Criteria, as deferred dividends are still payable on redemption. In our view the common dividend stopper is a strong incentive not to defer, as this would prevent Ardagh from extracting dividends from AMP. The preferred shares represent a limited part of AMP's overall capital structure. A change in structure, including materiality, could lead to a reassessment and, ultimately, a different treatment.

Derivation Summary

AMP is one of the leading metal beverage can producers globally. Its business profile is weaker than that of higher-rated peers such as Berry Global Group, Inc. (BB+/Stable) and Silgan Holdings Inc. (BB+/Stable). AMP has smaller-scale operations and lower customer diversification, but this is offset by its leading position in the beverage can sector and long-term relationship with customers.

AMP compares favourably with CANPACK Group, Inc. (BB-/Stable) and Titan Holdings II B.V. (B/Positive), which are similarly focused on beverage and food metal packaging. AMP has greater scale than both peers and is bigger than Reno de Medici S.p.A. (B+/Stable), but shares these entities' limited product diversification.

AMP's direct metal can-producing peers are larger in revenue, such as Ball Corporation at USD14 billion (2023) and Crown Holdings at USD12 billion (2023), but AMP has similar market positions. Ball Corporation and Crown Holdings reported a decline of revenue in 2023 while AMP's revenue saw low single-digit growth. Similar to Ball Corporation, Crown Holdings and CANPACK, AMP reduced its growth capex for 2023 and 2024.

AMP's EBITDA margin was under pressure during 2022-2023 before we forecast it to gradually recover towards 12.5% by 2026. It compares well with Reno de Medici's and CANPACK's profitability. AMP's EBITDA margin is below Berry Global Group's and Silgan Holdings' 14%-15%.

AMP's FCF is comparable with CANPACK's but weaker than that of Berry Global and Silgan Holdings, which both have sustained positive FCF.

AMP's leverage remains weaker than higher-rated peers', with forecast EBITDA gross leverage at about 7.8x at end-2024. This is higher than EBITDA leverage reported by Berry Global, Silgan Holdings, CANPACK and Sappi Limited (BB+/Stable). This is reflected in its SCP differentials with the higher-rated peers'.

Key Assumptions

Revenue to grown on average 3.3% during 2024-2027

EBITDA margin of about 10.0% in 2024, before rising to about 13.8% by 2027, driven by better cost absorption after the completion of large capex and costs savings related to permanent closures of less efficient plants

Annual preferred dividend payments of about USD24 million a year to 2027

Dividend payments of about USD240 million a year to 2027

Capex of about USD230 million in 2024, and USD215 million-USD220 million in 2025-2027

No debt issuance during 2024-2026

No share buybacks during 2024-2027

No M&As to 2027

Recovery Analysis

The recovery analysis assumes that AMP would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated.

Our GC value estimate available for creditor claims is about USD2.5 billion, assuming GC EBITDA of USD550 million. The GC EBITDA reflects distressed EBITDA, which incorporates the loss of a major customer, secular decline or ESG-related adverse regulatory changes related to AMP's operations or the packaging industry in general. The GC EBITDA also reflects corrective measures taken in a reorganisation to offset the adverse conditions that trigger a default.

We assume a 10% administrative claim.

We use an enterprise value (EV) multiple of 5.5x EBITDA to calculate a post-reorganisation valuation. The multiple is based on AMP's global market leading position in an attractive sustainable niche with resilient end-market demand. The multiple is constrained by a less diversified product offering and some commoditisation within packaging.

We deduct about USD200 million from the EV, relating to AMP's highest usage of its factoring facility, in line with our criteria.

We estimate the total amount of senior debt claims at USD3.6 billion, which includes senior secured notes of USD1.7 billion (equivalent) and senior unsecured notes of USD1.6 billion (equivalent).

The waterfall analysis, after deducting priority claims, generates a ranked recovery for AMP's senior secured notes in the 'RR1' category, leading to a 'BB-' rating. The waterfall-generated recovery computation output score is 100%. For AMP's senior unsecured notes the score is 30%, leading to 'RR5' and 'CCC+' rating.

RATING SENSITIVITIES

Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:

An upgrade of Ardagh's IDR from an improved consolidated credit profile or weaker ties between AMP and Ardagh

Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:

A downgrade of Ardagh's IDR or tighter links between AMP and Ardagh

Weakening of AMP's SCP as underscored by sustained negative FCF margins and EBITDA leverage sustained above 8.0x

Liquidity and Debt Structure

Satisfactory Liquidity: At end-March 2024, AMP reported Fitch-defined readily available cash of USD59 million, after restricting USD96 million to cover intra-year working capital needs. AMP has no material scheduled debt repayments until 2027. Liquidity is supported by an available undrawn part of an asset-based loan due in August 2026 in the amount of USD174 million. Available liquidity is sufficient to cover negative FCF of about USD180 million in the next 12 months stemming from capex and dividends payments.

Fitch-adjusted short-term debt is represented by a drawn factoring facility of about USD223 million. This debt self-liquidates with factored receivables.

Issuer Profile

AMP is one of the largest producers of metal beverage cans globally with a current production capacity of over 45 billion cans a year.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Ardagh Metal Packaging S.A. has an ESG Relevance Score of '4' for Management Strategy due to a complex funding strategy, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

Ardagh Metal Packaging S.A. has an ESG Relevance Score of '4' for Group Structure due to complexity of ownership and funding structure reducing transparency, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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