W.R. Grace Co. Downgraded To #BB# From #BB+# Due To New Debt And Weaker-Than-Expected P Outlook Stable

Stocks and Financial Services Press Releases Wednesday February 14, 2018 09:56
NEW YORK--14 Feb--S&P Global Ratings
NEW YORK (S&P Global Ratings) Feb. 13, 2018--S&P Global Ratings today lowered its corporate credit rating on W.R. Grace & Co. to 'BB' from 'BB+'. The outlook is stable.

At the same time, we assigned our 'BBB-' issue-level and '1' recovery ratings to the company's proposed new $600 million and $300 million term loans and proposed revolving credit facility. The '1' recovery rating reflects our expectation of very high (90%-100%; rounded estimate: 95%) recovery in the event of a payment default. We also lowered our issue-level ratings on the company's existing unsecured notes to 'BB-' from 'BB+' and revised our recovery rating on the associated debt to '5' from '4'. The '5' recovery rating reflects our expectation of modest (10%-30%; rounded estimate: 15%) recovery in the event of payment default.

All ratings are based on preliminary terms and conditions. We expect to withdraw our ratings on the company's existing euro- and U.S. dollar-denominated term loans and on the company's existing credit facility at the close of this transaction.

The downgrade reflects our view that W.R. Grace's credit metrics will weaken as a result of increased debt related to the acquisition at a time when operating performance was already under pressure. The company is issuing two term loans--for $300 million and $600 million--to fund the acquisition and refinance the existing $408 million and EUR80 million outstanding term loans. The company also plans to issue a $400 million revolving credit facility, which will replace the existing $300 million facility, to accommodate recent growth.

The stable outlook reflects our view that the company's credit measures are appropriate for the new, lower rating given the increase in debt that resulted from the company's debt issuance to fund its pending acquisition of Albemarle's polyolefin catalyst assets. Pro forma for the transaction, we expect that the company's debt to EBITDA will be about 4x and that FFO to debt will be 15%-20% on a weighted average of historical and projected figures. At the current rating, we expect W.R. Grace's EBITDA margins to remain between 25% and 30%. We also expect that the company will be able to successfully integrate the acquisition and that it will contribute EBITDA for about three quarters of the 2018 calendar year. We have not factored any additional debt-funded acquisitions or shareholder rewards into our current projections.

Although unlikely, we could lower ratings again in the next 12 months if we expect that the company's FFO to debt will fall below 12% or that its debt to EBITDA will exceed 5x for an extended period, pro forma for the transaction. This could occur if operating performance is substantially weaker than expected due to margin compression or price fluctuations. We could also lower the ratings if we believed the company's financial policy will no longer support current credit quality, which could occur if it increases debt further to fund substantial acquisitions or if it were to pursue any significant debt-funded shareholder rewards.

We could raise ratings within the next 12 months if the company has better-than-expected operating performance that leads to improved credit measures. This could occur if the company lowers operating costs with an effective product and regional mix and if margins increased by at least 500 basis points. To consider an upgrade, we would expect the company's FFO to debt to exceed 20% and debt to EBITDA to remain below 4x on a sustained basis. These metrics would have to be accompanied by supportive financial policies over the next year and our continued assessment of its business risk profile as at least satisfactory.


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