Ardagh Metal Packaging Finance plc — Moody’s assigns Ardagh Metal Packaging S.A. first-time B1 CFR; stable outlook

Rating Action: Moody’s assigns Ardagh Metal Packaging S.A. first-time B1 CFR; stable outlookGlobal Credit Research – 25 Feb 2021Moody’s assigns Ba2 rating to the proposed $1,150 million equivalent guaranteed senior secured notes due 2028 and B3 rating to the $1,500 million equivalent guaranteed senior unsecured notes due 2029Milan, February 25, 2021 — Moody’s Investors Service (« Moody’s ») has today assigned a first-time B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) to recently created Luxembourg based metal beverage can manufacturer Ardagh Metal Packaging S.A. (AMP or the « company »). Concurrently, Moody’s has assigned a Ba2 rating to the proposed $1,150 million equivalent guaranteed senior secured notes due 2028 and a B3 rating to the proposed $1,500 million equivalent guaranteed senior unsecured notes due 2029, both to be co-issued by Ardagh Metal Packaging Finance plc and Ardagh Metal Packaging Finance USA LLC. The outlook on all ratings is stable.AMP is the metal packaging business of ARD Finance SA (Ardagh, B3 stable), parent of Ardagh Group S.A. As announced by Ardagh on 23 February, AMP will be listed on the NYSE through the business combination with Gores Holding V, a special purpose acquisition company sponsored by an affiliate of The Gores Group. Upon completion of the transaction, expected in Q2 2021, and assuming no redemptions by Gores Holdings V’s public stockholders, Ardagh will retain approximately 80% stake in AMP. As part of the transaction, AMP will issue $1,150 equivalent senior secured notes and $1,500 million equivalent senior unsecured notes. Proceeds from the notes will be used to provide cash consideration to Ardagh Group S.A., for general corporate purposes and to pay fees and expenses related to the transaction. »The B1 rating is currently weakly positioned in light of the company’s high gross leverage and the expectation of negative free cash flow for the next two years which will add pressure on liquidity. The rating is constrained by AMP’s business concentration in terms of product offering, end-market and customer base, the execution risk associated with its $1.8 billion growth plan including the risk of industry overcapacity with negative effect on prices and profitability  » says Donatella Maso, Moody’s Vice President, and lead analyst for AMP. « At the same time, the rating is supported by AMP’s leading position in the consolidated but equally competitive metal beverage can industry, and potential for significant earnings growth supported by contracted capacity additions and positive demand trends for beverage cans », adds Ms Maso.A full list of new ratings is provided towards the end of this press release.RATINGS RATIONALEThe B1 CFR assigned to AMP is weakly positioned but supported by the company’s leading market position as world’s third largest beverage can manufacturer in a well-structured and consolidated but equally competitive industry with some barriers to entry; positive market fundamentals for beverage cans driven by sustainability trends, the emergence of new drinks categories and undersupply in certain regions, which combined with the contracted capacity additions will support the EBITDA growth in the next few years; and its 2020 resilient performance during the coronavirus pandemic.Conversely, the B1 rating is constrained by AMP’s business concentration in terms of product, end-market and customers; a degree of exposure to fluctuating input prices and currencies, albeit mitigated by pass though clauses in majority of customers contracts, hedging, and by the debt being issued in different currencies matching cash flows; the execution risk associated with the $1.8 billion investment plan across multiple facilities, countries and regions, and concentrated in 2021 and 2022; potential for industry overcapacity with negative effect on prices and profitability if the anticipated demand for beverage cans does not materialise; and the expectation of negative free cash flow (FCF) until 2023, mainly driven by the announced large growth investment spending.The rating is also constrained by the high opening leverage expected to be above 6.0x, as adjusted by Moody’s, and based on FY2020 EBITDA and the appetite for high leverage of the broader group, albeit the company’s stated intention is to operate under a net leverage of 3.0x-3.5x which translates in Moody’s’s adjusted leverage of 4.0x-4.5x. The rating nonetheless assumes that the company will delever towards 5.0x over the next two years as revenues and EBITDA will benefit from the additional built capacity, backed by customer contracts. However, considering the expected cash overfund of $225 million and the cash which will be absorbed prior to closing due to the business seasonality, the company will need to fund the investment plan with external sources of liquidity in the next two years, which may result in some volatility in the leverage metric and delay any significant improvement in deleveraging.The rating assumes that the business combination and the listing of AMP will be executed as outlined including the signing of a new asset base lending facility (ABL) facility of sufficient size that will help the company to finance its investment plan.ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONSAMP is subject to a broad range of environmental and health and safety laws, including those governing discharges to air, soil and water, the handling and disposal of hazardous substances. Various proposed and instituted mandates around the globe demonstrate the increased focus on environmental issues in the industry including improving recyclability and reducing waste. Moody’s views AMP’s exposure to these laws and regulation as manageable. Furthermore, aluminium displays the highest recycling rates compared to glass and PET, and it can be recycled continuously in a cost-efficient manner without loss of quality.From a social risk perspective, AMP can benefit from an increasing demand for aluminium products because of growing environmental awareness and preference for recyclable packaging among consumers; greater focus on sustainability among customers; and regulations intended to reduce greenhouse gases, curb the use of plastics and invest in recycling infrastructure.Governance risks are more relevant for AMP than environmental and social considerations. Although AMP will likely benefit from a level of transparency typical of publicly listed companies, its ownership will be concentrated with the Ardagh Group S.A., which will retain approximately 80% stake post listing. Ardagh has also the right amongst other things to nominate the board directors in proportion to its shares in AMP and to approve certain material actions as long as it holds at least 40% of the outstanding shares in the company. At completion of the transaction, the CEO and CCO of Ardagh will act as Chairman and Vice-Chairman of AMP respectively and nine directors will be nominated by Ardagh. These considerations could limit the independence of the board of AMP and ultimately influence its business and financial policies.LIQUIDITYMoody’s views AMP’s liquidity currently as weak for its near-term requirements. The liquidity is supported by $482 million pro forma cash on balance sheet at close, albeit based on the cash position at the end of 2020 and the overfund from the transaction, the expectation for a new ABL of sufficient size, and access to uncommitted non-recourse factoring arrangements. These sources are deemed sufficient to cover seasonal fluctuations in working capital, maintenance capital spending while there are no material near term debt maturities. However, the anticipated negative free cash flow over the next two years will likely result in increasing funding needs. Moody’s also expects that the company will not distribute dividends until 2023.The new ABL facility will be subject to a springing financial covenant that will require AMP to maintain a 1.0x fixed charge coverage ratio, tested quarterly, if global borrowing availability is less than a percentage to be agreed of the lesser of (i) the commitments as of such date and (ii) the global borrowing base as of such date. Moody’s expects AMP to maintain adequate flexibility to the covenants in the next 12-18 months.STRUCTURAL CONSIDERATIONSThe B1 CFR has been assigned to AMP, the top entity of the restricted group that will provide consolidated financial statements going forward. The B1-PD PDR is aligned with the CFR based on a 50% recovery rate, as is customary for transactions including both bonds and bank debt.The Ba2 instrument rating assigned to the $1,150 million equivalent guaranteed senior secured notes is two notches above the CFR mainly reflecting the significant amount of debt ranking junior to the notes. The B3 instrument rating assigned to the $1,500 million equivalent guaranteed senior unsecured notes is two notches lower than the CFR, reflecting their subordination to the sizeable amount of senior secured debt that ranks ahead.Upon completion of the transaction, the senior secured notes will be secured by share pledges and floating charges over assets in England, Wales and the US. The senior secured notes will rank junior with respect to the ABL’s collateral. Both senior secured and senior unsecured notes will be guaranteed by the parent guarantor (AMP) and its subsidiaries which represent 73% of aggregate assets and 74% of consolidated EBITDA as of December 2020.The notes issued within the AMP restricted group will be ring fenced, with no cross default provisions with the debt sitting at its parent company (Ardagh) and no upstream or downstream guarantees.RATIONALE FOR STABLE OUTLOOKAMP is initially weakly positioned in the B1 rating category and Moody’s expects the company to build capacity within its rating overtime and to improve its liquidity. The stable outlook reflects Moody’s view that AMP’s future earnings will benefit from the expected capacity additions which will result in financial leverage to gradually reduce from the opening level and in FCF to improve beyond 2022 and that the company will maintain an adequate liquidity profile. The outlook also incorporates our assumption that AMP will successfully execute its expansion plan, will maintain a stable customer base and will not engage in material shareholder distributions.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade on the rating is unlikely in the near term as the company is initially weakly positioned in the rating category. Positive pressure on the rating could arise overtime if AMP executes and completes successfully its can capacity growth plan and demonstrates a track record of consistent and prudent financial policies maintaining a Moody’s adjusted leverage sustainably below 4.5x and generating sustained positive free cash flow.Negative pressure on the rating could arise if the company fails to gradually reduce its Moody’s adjusted leverage gross leverage from the opening level during 2021 and does not delever below 5.5x by the end of 2022; its FCF remains negative beyond 2022, or the company fails to establish an ABL facility of sufficient size upon closing the transaction or if its liquidity weakens. More aggressive financial policy or a deterioration on AMP’s parent company’s rating could also add pressure on its rating.LIST OF AFFECTED RATINGS..Issuer: Ardagh Metal Packaging S.A.Assignments:…. Probability of Default Rating, Assigned B1-PD….LT Corporate Family Rating, Assigned B1Outlook Action:….Outlook, Assigned Stable..Issuer: Ardagh Metal Packaging Finance plcAssignments:….BACKED Senior Secured Regular Bond/Debenture, Assigned Ba2….BACKED Senior Unsecured Regular Bond/Debenture, Assigned B3 Outlook Action: ….Outlook, Assigned Stable PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass and Plastic Containers Methodology published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1236221. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEAMP is a global manufacturer of metal cans for the beverage industry. AMP operates through 23 plants located in 9 countries across Europe, North America and Brasil. AMP has recently announced the intention to build 21 billion can of additional capacity over the period 2021-2024 with an investment of $1.8 billion. For the financial year ending 31 December 2020, AMP generated approximately $3.5 billion of revenue and $545 million of EBITDA, as reported by the company.AMP is a Luxembourg based company, expected to be listed on the New York Stock Exchange in Q2 2021. Upon completion of the IPO, Ardagh will remain the majority shareholder with 80% share.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. 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