Rating Action: Moody’s upgrades KIK’s CFR to B3; outlook remains stable
Global Credit Research
Approximately $640 million of rated debt affected
Toronto, October 11, 2013 — Moody’s Investors Service upgraded KIK Custom Products Inc.’s (“KIK”) corporate family rating (“CFR”) to B3 from Caa1, probability of default rating to B3-PD from Caa1-PD, first lien term loan rating to B2 from B3, and affirmed the Caa2 rating on the company’s second lien term loan. KIK’s rating outlook remains stable.
On October 10, 2013, KIK announced the acquisition of BioLab Inc. (“BioLab”) for $315 million. BioLab, a subsidiary of Chemtura Corporation (Ba3 stable), develops and markets pool and spa additives primarily in North America and Europe. Moody’s believes the acquisition will provide KIK with more than 25% market share in the pool additives business in the US. KIK has secured $75 million of equity commitments and has $275 million of new debt underwritten to fund the acquisition. The transaction is subject to regulatory approval and is expected to close by the end of the year.
“The ratings upgrade recognizes KIK’s continuing improvement in operating results and expectations that bleach compaction and the existing pool additives business will support modest earnings growth and deleveraging in the next 12 to 18 months”, says Peter Adu, Moody’s lead analyst for KIK. “In addition, BioLab will provide KIK with a leading market position in the pool additives business in the US and the transaction is deleveraging with synergies”, Adu further added.
Corporate Family Rating to B3 from Caa1
Probability of Default Rating to B3-PD from Caa1-PD
$420 million First Lien Term Loan due 2019 to B2 (LGD3, 33%) from B3 (LGD3, 35%)
$220 million Second Lien Term Loan due 2019 at Caa2 (LGD5, 79%)
KIK’s B3 CFR primarily reflects its high leverage (pro forma adjusted Debt/EDITDA of 6.3x), an owner that may favor debt-financed acquisitions over deleveraging, and the presence of a significantly larger and better capitalized branded competitor, Clorox Company (Baa1 Stable). The company has not demonstrated an ability to repay debt meaningfully from free cash flow and Moody’s expects the trend to continue through the next 12 to 18 months as capital expenditures could increase with the integration of BioLab. The rating considers KIK’s sizeable share of the US private label bleach market, its position as the largest contract manufacturer for blue-chip consumer packaged goods customers, and its potential leading position in a third business, pool additives after it closes the BioLab acquisition. While many of the company’s products are non-discretionary, they tend to have low growth characteristics. In addition, operating results may be volatile given KIK’s relatively high exposure to raw material costs. Moody’s expects pool additives and bleach compaction to drive modest improvement in margins which should enable leverage to fall below 6x in the next 12 to 18 months.
KIK’s liquidity is assessed as adequate, supported by cash of $18 million at Q2/13, expectations for annual free cash flow near $10 million, and about $55 million of availability under its $75 million ABL revolver due 2018. These sources are ample to meet anticipated term loan amortization of about $4 million per year. KIK will not have to comply with any financial covenant unless its excess availability falls below $7.5 million, to which it will have to comply with a minimum fixed charge coverage ratio of 1x. Moody’s does not expect this covenant to be restrictive for the foreseeable future. Access to alternative liquidity from asset sales is unlikely because substantially all of the company’s assets are pledged as collateral for its new credit facilities.
The outlook is stable given Moody’s expectation that KIK’s leverage will decline to a level more supportive of the B3 rating within 12 to 18 months.
Moody’s will consider upgrading KIK’s ratings if it maintains adequate liquidity, proves its ability to generate consistent positive free cash flow, and sustains adjusted Debt/EBITDA towards 5x along with FCF/Debt well above 5%. The rating will be downgraded if there is significant deterioration in operating performance arising from volume or price declines and margin contraction such that adjusted Debt/EBITDA is sustained towards 7x. Negative free cash flow generation on a consistent basis can also cause a downgrade.
The principal methodology used in this rating was the Global Packaged Goods Methodology published in June 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
KIK Custom Products Inc. manufactures a variety of household cleaning, personal care, over-the-counter and prescription drug products, and pool additives. Revenue for the last twelve months ended June 29, 2013 was $1.2 billion. KIK is controlled by CI Capital Partners and is headquartered in Concord, Ontario, Canada.
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- 11 Oct, 2013
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