Score Motion: Moody’s modifications Trinseo’s outlook to unfavourable after PMMA acquisition announcement
World Credit score Analysis – 17 Dec 2020
New York, December 17, 2020 — Moody’s Buyers Service, (“Moody’s”) affirmed the rankings of Trinseo S.A. (“Trinseo”; Company Household Score at Ba3) and its subsidiary, Trinseo Supplies Working S.C.A., subsequent to the announcement that the corporate has agreed to accumulate the PMMA enterprise of Arkema for roughly $1.4 billion. The transaction shall be financed with as much as $250 million of money and as much as $1.2 billion of recent debt to be issued by Trinseo; the acquisition is anticipated to shut in mid-2021. Moody’s additionally maintained its Speculative Grade Liquidity Score at SGL-1. Nevertheless, the outlook was modified to unfavourable from secure.
“The PMMA acquisition will considerably increase Trinseo’s EngineeredMaterials enterprise and improve margins, however the firm is paying a full a number of for this enterprise throughout a pandemic induced downturn and financing the vast majority of the acquisition value with debt,” acknowledged John Rogers, Senior Vice President at Moody’s and lead analyst on Trinseo.
Scores affirmed: ..Trinseo S.A.
.Company Household Score at Ba3
.Chance of Default Score at Ba3-PD
..Trinseo Supplies Working S.C.A.
.Assured senior secured revolver and time period mortgage to Ba2 (LGD3)
.Assured senior unsecured notes to B2 (LGD5)
..Trinseo S.A. to unfavourable from secure
..Trinseo Supplies Working S.C.A. to unfavourable from secure
The affirmation of Trinseo’s Ba3 Company Household Score (CFR) displays its measurement by way of income and property, vital and sustainable market positions in every of its segments, comparatively secure profitability in specialty companies and an skilled administration crew with a monitor file of conservative monetary administration.
The transfer to a unfavourable outlook displays uncertainty over the timeframe for a sustained restoration within the PMMA enterprise, the influence of accelerating international capability in styrene and a roughly doubling of steadiness sheet debt as a result of transaction. The last word influence of the coronavirus on key downstream markets for Trinseo’s and the PMMA enterprise’ merchandise shouldn’t be sure and will not get better as rapidly as at the moment anticipated, including to the chance usually related to a big acquisition that makes use of completely different applied sciences and companies new market niches.
Administration is taking vital actions to restrict the unfavourable influence from a credit score standpoint by slashing the dividend, halting share repurchases and specializing in free money circulation era to speed up debt discount after the acquisition. Trinseo additionally expects to generate $50 million of price synergies over three years and an extra $25 million in synergies from changing the enterprise to Trineso’s ERP system. Trinseo’s administration expects to scale back unadjusted internet leverage again to the mid-2x vary by 2023.
Trinseo is buying the polymethyl methacrylates (“PMMA”) and activated methyl methacrylates companies from Arkema. PMMA is a clear plastic utilized in a variety of functions, together with many who overlap with Trinseo’s present Efficiency Plastics enterprise (will change into a part of the Engineered Materials phase). The enterprise is vertically again built-in into the monomer MMA, through a manufacturing facility in Europe and a long run cost-based contract within the US. Whereas PMMA is generally related acrylic sheet merchandise, Arkema’s PMMA enterprise generates the vast majority of its profitability from the sale of compounded resins utilized in higher-value functions in auto, lighting, medical and electronics markets. The Arkema enterprise suffers from comparatively low development within the US and Europe. Trinseo expects to generate quicker development by increasing gross sales into Asia.
Trinseo’s Speculative Grade Liquidity ranking of SGL-1 displays wonderful liquidity primarily supported by a money steadiness, of roughly $300 million subsequent to the acquisition and the expectation that free money circulation will stay constructive regardless of the sluggish restoration in demand in Europe. Moreover, the corporate has entry to a $375 million revolver maturing in 2022 with $360 million of availability attributable to $15 million in letters of credit score, and a $150 million A/R securitization that had no excellent borrowings however was restricted by collateral to roughly $127 million. The corporate has a springing covenant in its revolver which requires the corporate to keep up a professional forma first lien internet leverage ratio of lower than 2.0x, if larger than 30% is drawn. The corporate will possible haven’t any issue in assembly this covenant over the subsequent 12-18 months, assuming that the extra debt it points to fund the acquisition is unsecured.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An improve to the ranking is extremely in contrast to over the subsequent 2-3 years as a result of extra debt incurred to fund the acquisition of the PMMA enterprise. Nevertheless, the CFR might be upgraded if Trinseo’s companies excluding Polystyrene and Feedstocks persistently generates EBITDA of over $450 million, steadiness sheet debt falls to roughly $1.5 billion and free money circulation stays above $150 million. This may additionally indicate that leverage throughout the subsequent downturn wouldn’t rise above 4x. The ranking might be downgraded if leverage stays above 4.5x in 2023 or if the corporate fails to generate free money circulation on a sustained foundation.
Environmental, social and governance (ESG) components are vital issues in Trinseo’s credit score high quality. The corporate is uncovered to environmental and social dangers typical for a big, diversified chemical firm. The corporate has beneath common publicity to environmental liabilities as they’ve an indemnification from Dow (Baa2 secure) on all liabilities previous to the carve-out from Dow in 2010. Nevertheless, Trinseo does have publicity to stryene, which is “moderately anticipated to be a human carcinogen” by the US regulatory authorities. Given the dimensions of the corporate’s styrene operations this can be a modest credit score unfavourable and will increase environmental and social danger.
Moody’s famous that many chemical compounds have obtained the identical designation or a extra extreme designation – recognized to be a human carcinogen – with minimal influence on the chemical’s use in industrial functions. The priority for styrene, and most different industrial chemical compounds, is that shopper conduct will be influenced by partisan public relations campaigns and non-scientific research. In Moody’s view, the most important end-use that might be in danger given this designation could be for polystyrene utilized in meals contact functions – meals packaging and disposable cups and cutlery. Nevertheless, this can be a small portion of Trinseo’s polystyrene enterprise (about 10%).
Recycling of plastics is a rising social danger inflicting many packaging and shopper productions corporations to reassess their package deal designs and supplies. Moody’s believes that certian plastics like polystyrene and PVC could also be deselected in these functions over time to be able to improve the standard of recycled plastics. Whereas polystyrene is straightforward to recycle by itself, it may considerably degrade the efficiency of recycled plastic when comingled with polyethylene and polypropylene.
Trinseo’s governance-related dangers are decrease than common because it has an impartial board of administrators, detailed reporting necessities, administration’s a monitor file of assist for a relative conservative quantity of steadiness sheet debt (1-2x leverage on the peak of the cycle).
The principal methodology utilized in these rankings was Chemical Business printed in March 2019 and obtainable at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Score Methodologies web page on www.moodys.com for a replica of this technique.
Trinseo S.A. is the world’s largest producer of styrene butadiene (SB) latex, the most important European producer of SSBR rubber (resolution styrene butadiene rubber), the third largest international producer of polystyrene and a large producer of engineered polymer blends. Trinseo usually has revenues of $3-4 billion relying on petrochemical feedstock costs, 24 manufacturing websites world wide, and over 2,700 workers.
For additional specification of Moody’s key ranking assumptions and sensitivity evaluation, see the sections Methodology Assumptions and Sensitivity to Assumptions within the disclosure type. Moody’s Score Symbols and Definitions will be discovered at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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Regulatory disclosures contained on this press launch apply to the credit standing and, if relevant, the associated ranking outlook or ranking evaluation.
Moody’s normal ideas for assessing environmental, social and governance (ESG) dangers in our credit score evaluation will be discovered at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The World Scale Credit score Score on this Credit score Score Announcement was issued by one among Moody’s associates outdoors the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Most important 60322, Germany, in accordance with Artwork.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit score Score Businesses. Additional data on the EU endorsement standing and on the Moody’s workplace that issued the credit standing is offered on www.moodys.com.
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John Rogers Senior Vice President Company Finance Group Moody's Buyers Service, Inc. 250 Greenwich Road New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Consumer Service: 1 212 553 1653 Glenn B. Eckert Affiliate Managing Director Company Finance Group JOURNALISTS: 1 212 553 0376 Consumer Service: 1 212 553 1653 Releasing Workplace: Moody's Buyers Service, Inc. 250 Greenwich Road New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Consumer Service: 1 212 553 1653
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