Fitch Ratings has placed Univar Solutions, Inc.'s 'BB+' Long-Term Issuer Default Ratings (IDR) on Rating Watch Negative following the company's March 14, 2023 announcement of its pending acquisition by funds managed by affiliates of Apollo Global Management, L.P. (A/Stable), an alternative asset manager.
Fitch has also placed the ratings of Univar's existing ABL facilities, first-lien senior secured term loans, and senior unsecured notes on Rating Watch Negative.
The Negative Watch reflects Fitch's expectations for EBITDA leverage to increase to approximately 4.5x as a result of the transaction, along with uncertainty regarding Univar's long-term capital structure and financial and capital allocation policy.
Fitch anticipates resolving the Rating Watch upon completion of the contemplated merger, or when there is full certainty on the closing capital structure and related terms. Fitch notes that the contemplated transaction may take longer than six months to close.
The current 'BB+' rating reflects Univar's leading market position in chemicals and ingredients distribution, flexible and scalable operating model, resilient and improving profit margins and considerable FCF generation in all operating environments.
Key Rating Drivers
Leveraging Acquisition, Deleveraging Capacity: Per a definitive agreement, Univar will be acquired by funds managed by affiliates of Apollo Global Management, L.P. (Apollo) in a transaction that values the enterprise value of company at approximately $8.1 billion (8.0x Fitch 2022 EBITDA of approximately $1.0bln). The transaction also includes a minority investment from a wholly owned subsidiary of the Abu Dhabi Investment Authority (ADIA) and is currently anticipated to close by year-end.
The transaction will be financed through a combination of $3.8 billion in committed equity contributions from affiliates of funds managed by affiliates of Apollo and a wholly owned subsidiary of ADIA, and committed credit facilities consisting of a $2.1 billion senior secured term loan facility, a $2.0 billion senior secured bridge loan facility, and a $1.4 billion ABL revolver. Assuming Univar's existing debt is repaid at close, Fitch estimates pro forma EBITDA Leverage to increase to approximately 4.5x, compared to 2.3x at YE 2022.
While the company's credit metrics are likely to be pressured as a result of the acquisition, Fitch recognizes the company should retain solid deleveraging capacity over the medium-term, subject to a prudent financial policy. This is supported by expectations for the company to regularly generate strong, positive FCF of around $400 million annually through the forecast period, providing the company with substantial financial flexibility to pursue its strategic priorities.
Uncertain Capital Deployment: The Negative Watch in part reflects uncertainties regarding Univar's capital allocation policy under new ownership. Specifically, Fitch notes an increased potential for future debt-funded acquisitions or special dividends when leverage is elevated, which could further pressure the company's credit metrics. With EBITDA leverage expected to be around 4.5x at close of the Apollo acquisition, Fitch would like to see an explicit and demonstrated commitment toward gross debt reduction over the medium-term, such that EBITDA Leverage trends back to within our respective rating tolerances.
Strong Performance Through Market Tailwinds: Univar effectively navigated the period of elevated transportation and logistics costs stemming from global supply chain constraints seen in 2022, with revenues and EBITDA increasing by 20% and 45%, year-over-year (yoy) respectively, and meaningful market share gains. The company owning its own transportation fleet provided a unique advantage over competitors in meeting the needs of customers and producers, who are increasingly focusing on security of supply.
This, along with increased value-added service penetration, an optimized digital marketing and e-commerce platform, and a difficult-to-replicate global supplier network provide further competitive advantages for Univar going forward. While Fitch expects a period of normalization in chemicals pricing over the medium term, Univar is still positioned to generate solid earnings over the period, averaging around $850 million in annual EBITDA through 2024.
Resilient and Improving Margins: The company has successfully sought to improve EBITDA margins in recent years by pruning or divesting some of its lower margin or non-core products, investing in logistic productivity needs and revamping its U.S. salesforce and building out its solutions centers in order to understand and solve customer needs with more complex solutions.
The 2019 Nexeo acquisition also strengthened Univar's product portfolio and provided the opportunity for additional product capture from existing customers in its more resilient, higher margin, higher growth markets, including adhesives and sealants, food ingredients, personal care and pharmaceutical ingredients. The company targets a 9% EBITDA margin by 2024.
Of note, Univar reports that its Ingredients & Specialty business is approximately 40% of gross profit, and 50%+ of reported EBITDA. The company aims to focus on growing this business going forward through further market share gains and new partnerships, which should support stronger margins going forward. Fitch forecasts Univar to maintain EBITDA margins around 8.7% by 2025.
Fragmented Market Provides Opportunity: The global chemical distribution market is highly fragmented, with an estimated market size of roughly $200 billion and the top two distributors accounting for about 10% of the market. Benefiting from size, scale and diversification, Univar Solutions is better able to navigate logistical challenges and counterparty risk than smaller competitors.
The company maintains the largest chemicals and ingredients sales force in North America, the broadest product offering and an increasingly efficient supply chain network, allowing Univar Solutions to continue to grow by leveraging its footprint to cover more products, customers and regions.
Derivation Summary
Univar Solutions is the second largest global chemical distributor behind Brenntag and is the largest North American chemical distributor in a fragmented industry. Fitch compares Univar Solutions with chemical distributors Brenntag and Blue Tree Holdings (BB-/Stable), IT distributor Arrow Electronics, Inc. (BBB-/Stable) and metals distributor Reliance Steel and Aluminum Co. (BBB+/Stable).
Each of these distributors benefits from significant size, scale and diversification compared with peers within their markets. Fitch believes the fragmented nature of, and potential for, continued outsourcing within chemicals distribution provides Univar Solutions a unique opportunity to increase market share and capture potential market expansion. Supported by an unmatched value-added service offering, Univar generates stronger EBITDA margins than Blue Tree and Arrow Electronics.
Fitch views cashflow risk within the distribution industry as relatively low compared with chemicals producers given the limited commodity price risk, diversification of customers and end markets, low annual capex requirements of 1%-2% annually and working capital benefits amid the current down cycle. While technology and metals distribution market risks differ, the overall operating performances and cashflow resiliency are similar, with FCF margins for these distribution peers averaging in the low- to mid-single digits over the past five years.
Key Assumptions
Fitch's Key Assumptions Within The Rating Case for the Issuer:
Moderating revenue growth in 2023 driven by lowering chemicals pricing and weaker global demand, followed by growth exceeding GDP thereafter;
EBITDA margins increase yoy due to increased value-added service penetration, cost cutting efforts, supply chain digitization and acquisition synergies;
Capex at roughly 1.5% of revenue annually;
FCF primarily allocated toward acquisitions.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Failure to complete the merger as contemplated will result in removal of the Negative Watch.
On a Standalone Basis:
Gross debt reduction leading to EBITDA Leverage sustained below 3.0x;
Improved financial flexibility evidenced by a less encumbered capital structure;
Continued EBITDA margin improvement towards 9%, suggesting successful organic and inorganic investments that further enhance the operational profile and reduce cashflow risk through increased differentiated offerings.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
To resolve the Negative Watch:
Completion of the contemplated merger, or certainty on closing capital structure and related terms.
On a Standalone Basis:
EBITDA Leverage sustained above 3.5x;
A sustained reduction in EBITDA margins below historical levels of 6%-7% leading to weaker FCF generation and financial flexibility;
An inability to effectively integrate acquisitions or realize expected operational and cost synergies;
Capital allocation prioritization toward additional acquisitions or shareholder returns over gross debt reduction that suggests a deviation in financial policy.
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 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Sufficient Liquidity: Univar Solutions has approximately $385 million of cash and cash equivalents on its balance sheet, and approximately $1.1 billion of availability under the $1.6 billion ABL revolving credit facilities, after approximately $353 million in borrowings and $128 million in LOCs as of Dec. 31, 2022. Fitch expects Univar Solutions to maintain sufficient liquidity given the forecast FCF profile.
Issuer Profile
Univar Solutions, Inc. (Univar) is a global chemical and ingredients distribution company and provider of value-added services, working with leading suppliers worldwide. It is headquartered in Downers Grove, Illinois and maintains the number one market position in North America and the number two position in Europe.
UNIVAR SOLUTIONS INC. 
