Vantage Specialty Chemicals Inc. #B-# Corporate Credit Rating Affirmed On Acquisition By H.I.G. New Debt Rated

Stocks and Financial Services Press Releases Thursday October 5, 2017 09:16
NEW YORK--5 Oct--S&P Global Ratings
NEW YORK (S&P Global Ratings) Oct. 4, 2017--S&P Global Ratings today affirmed its 'B-' corporate credit rating on Illinois-based Vantage Specialty Chemicals Inc. The outlook is stable.

At the same time, we assigned our 'B-' issue-level rating to Vantage Chemicals proposed $540 million first-lien credit facility. The recovery rating is '3', indicating our expectation for meaningful (50%-70%; rounded estimate: 55%) recovery in the event of payment default. Additionally, we assigned our 'CCC' issue-level rating to the company's proposed $170 million second-lien term loan. The recovery rating is '6', indicating our expectation for negligible (0%-10%; rounded estimate: 0%) recovery in the event of payment default.

We also affirmed the 'B-' issue-level rating, with a '3' recovery rating, on the existing first-lien credit facility and the 'CCC' rating, with a '6' recovery rating, on the second-lien term loan. We will withdraw the ratings on the existing debt once it is fully repaid.

All ratings on the proposed debt are based on preliminary terms and conditions.

The ratings on Vantage Specialty Chemicals reflect the modestly improved profitability achieved through cost-reduction and procurement initiatives, as well as the shift to a higher-value product mix. Vantage's profitability has also benefited from the acquisition of higher-margin business Mallet & Co. in 2016. Vantage's balance sheet debt is increasing significantly as the result of the transaction, and we forecast credit measures to remain weaker than those of other commodity chemicals peers such as Cornerstone Chemical Co., with weighted-average debt to EBITDA in the 5x-6x range. In our base-case forecast, we would expect weighted-average debt to EBITDA in the 6x-7x range and funds from operations (FFO) to debt between 7% and 8%. We expect that Vantage will maintain EBITDA margins in the 15%-16% range as it continues to recognize the benefits from prior acquisitions and cost-savings initiatives underway.

The stable rating outlook on Vantage reflects our expectation for modest EBITDA growth over the next year through procurement initiatives and improved product mix. We expect the company's EBITDA and cash flow generation to improve as the company integrates acquisitions and to improve its product mix in relatively stable noncyclical end markets. Additionally, we expect modest improvement based on our overall outlook for modest economic growth in the U.S. and our expectation that the company's strengths in the domestic market, its presence in Latin America, and its international distribution network will contribute to better overall volumes. Our stable outlook assumes that management and the company's owners will support credit quality and, therefore, we have not factored into our analysis any distributions to shareholders or significant debt-funded capital spending or acquisitions. Despite our expectation for EBITDA growth, we still expect that the company will maintain leverage credit measures in line with our expectations for the rating, with weighted-average debt to EBITDA above 6x.

We could lower the ratings over the next 12 months if Vantage's organic revenue growth stalled or if its margins declined significantly as the result of not recognizing its procurement and cost-savings initiatives. In addition, we could lower ratings if liquidity weakened such that sources were below 1.2x uses, if cash flow turned negative, or if we believed covenant compliance could become uncertain. We could also lower ratings should the company decide to pursue a large debt-funded acquisition, increasing leverage to unsustainable levels with debt to EBITDA greater than 9x.

We could consider an upgrade in the next 12 months if the company's growth exceeds our expectations coupled with procurement and cost-savings initiatives exceeding our expectations. In such a scenario, we would expect EBITDA margins 400 basis points (bps) greater than our expectations, resulting in FFO to debt of greater than 10% and debt to EBITDA approaching 6x on a sustained basis. We would also need to believe the company's financial sponsors would remain supportive of maintaining credit metrics at these levels.


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