THE CARLYLE GROUP INC.
Fitch Ratings has affirmed
Fitch has also affirmed
We do not expect an impact on the senior secured rating from Nouryon's new capital structure following the spin-off of
The rating reflects high funds from operations (FFO) gross leverage following the acquisition by
The Stable Outlook reflects the balance between the company's fairly predictable EBITDA generation as a pure specialty chemicals company with leading positions in niche markets, and a highly leveraged capital structure, albeit with a focus on gradual debt repayment.
KEY RATING DRIVERS
Nobian Sale Broadly Neutral: We estimate that the sale of Nobian will reduce Nouryon's sales, EBITDA and gross debt by approximately
As the two businesses had limited synergies and different strategies - as Nobian is a regional producer of more commoditised chemicals - we believe the sale is part of the strategic options considered by Nouryon's shareholders.
Debt Reduction: Following the carve-out of Nobian, Nouryon plans to use the proceeds to repay senior unsecured notes and part of its US dollar term loan B (TLB). Based on the current assumptions we do not expect the new capital structure to affect the senior secured rating.
Increased Standalone Margins: Fitch views Nouryon's strong 2020 performance as reflective of the company's focus on diversified and resilient end-markets, product differentiation, cost reductions and portfolio optimisation. Excluding the higher-margin Nobian, Nouryon's Fitch-adjusted EBITDA margin grew to 22.7% in 2020 from below 18% in 2018. We believe that Nouryon will maintain EBITDA margins above 22% and will grow revenue by around 4% per year, slightly above market growth, on successful product launches, capacity additions and inorganic growth.
Robust FCF Underpins Deleveraging: We expect Nouryon to generate recurring positive free cash flow (FCF) in the next four years, supporting a reduction of FFO gross leverage to below 5x in 2024 from 6.3x in 2020. While mandatory debt repayments are modest at about
Bolt-On Acquisitions to Continue: During 2020, Nouryon acquired the carboxymethyl cellulose (CMC) business from
Barriers to Entry: Fitch views significant barriers to entry to Nouryon's leading positions in niche markets, as the company specialises in products that are either providing differentiated or tailor-made properties, or that are key in the manufacturing process of a final product. This supports steady volumes, as seen in 2020 when they declined only 2%. Nouryon's R&D investments amount to around 3% of sales, and result in several new product launches every year.
No Dividend Assumed: We expect Carlyle to prioritise deleveraging and bolt-on acquisitions in the coming years. Clauses in Nouryon's debt documentation permit dividends below a certain leverage level but the company's leverage metrics remain above this threshold under our forecast. We believe that a significant shareholder distribution would not be consistent with the current strategy to voluntarily repay debt when feasible.
Regulatory Risk: An increasing focus by governments on more environmentally friendly manufacturing methods results in expensive and time-intensive adjustments to ensure compliance. While this could generally constitute a risk to the ability of Nouryon to sell its products, Fitch believes that it is unlikely to be negatively affected, given its proactivity to ensure the business remains compliant.
DERIVATION SUMMARY
Most of Nouryon's specialty chemicals peers in EMEA, such as
Nouryon is larger and more diversified across stable markets and has higher FCF margin than
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
Revenues to grow on average 3%-4% over 2021-2024
EBITDA margin on average at 22%-23% over 2021-2024
Annual capex on average at 6.5% of sales
M&A of
Assumed voluntary annual debt repayments of
No common dividends
Key Recovery Analysis Assumptions
The recovery analysis assumes that Nouryon would be reorganised as a going-concern (GC) in bankruptcy rather than liquidated.
The GC EBITDA estimate reflects Fitch's view of a sustainable, post-reorganisation EBITDA level upon which we base the enterprise valuation.
The GC EBITDA of
Fitch uses a multiple of 5.5x to estimate a GC enterprise value for Nouryon because of its leadership position, resilient exposure to non-cyclical end-markets, solid profitability and higher barriers to entry due to substantial R&D needs for product development.
The recovery analysis is based on the existing capital structure.
Fitch assumes the company's revolving credit facility (RCF) to be fully drawn and to rank pari passu with the TLB and other senior secured debt.
After deduction of 10% for administrative claims, Fitch's waterfall analysis generated a waterfall generated recovery computation (WGRC) for the senior secured instrument in the 'RR3' band, indicating a 'BB-' instrument rating and a WGRC for the senior unsecured instrument in the 'RR6' band, indicating a 'B-' rating. The WGRC output percentage on current metrics and assumptions was 65% for the senior secured debt and 0% for the senior unsecured debt.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
FFO gross leverage below 5.0x on a sustained basis
FFO interest coverage above 3.5x on a sustained basis
EBITDA margin sustained above 23% and FCF margins above 5% through achieved synergies and cost savings
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO gross leverage above 7.0x on a sustained basis
FFO interest coverage below 2.5x on a sustained basis
Weakening EBITDA and FCF margins; for example, as a result of lost market share or adverse regulatory changes
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Comfortable Liquidity: As of
Fitch expects Nouryon to generate positive FCF over the next four years. Fitch views this level of liquidity as sufficient to cover debt repayments in the coming four years while allowing flexibility to make voluntary debt repayments and realise acquisitions.
ISSUER PROFILE
Post-Nobian spin-off, Nouryon is a Netherland-based producer of specialty chemicals used in a broad range of sectors, owned by
SUMMARY OF FINANCIAL ADJUSTMENTS
For 2020:
Lease liabilities of
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR Nouryon Finance B.V.
senior unsecured
LT B- Affirmed RR6 B-
senior secured
LT BB- Affirmed RR3 BB-
Nouryon Holding B.V . LTIDR B + Affirmed B+
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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