Brenntag Finance B.V. — Moody’s upgrades Brenntag to Baa2; stable outlook

Rating Action: Moody’s upgrades Brenntag to Baa2; stable outlookGlobal Credit Research – 17 Mar 2021Frankfurt am Main, March 17, 2021 — Moody’s Investors Service (« Moody’s ») has today upgraded the issuer rating of Brenntag SE (« Brenntag ») to Baa2 from Baa3. Concurrently, Moody’s has also upgraded the backed senior unsecured EUR600 million euronotes rating maturing in 2025 to Baa2 from Baa3 of its guaranteed subsidiary Brenntag Finance B.V.. The outlook on both entities has been changed to stable from positive. »Today’s upgrade with stable outlook recognizes Brenntag’s strong operational performance through 2020 and the consistent track record that the company has built in managing its balance sheet relatively conservatively since its IPO in 2010 despite continued investments into the growth of the company. », says Martin Fujerik, Moody’s lead analyst for Brenntag.RATINGS RATIONALEToday’s action was supported by Brenntag’s strong operational performance through 2020, despite the spread of the coronavirus pandemic. Similar to its performance during the financial downturn 2008-09, in 2020 Brenntag managed to offset the pressure on volumes through higher gross margin per unit and delivered roughly a flat EBITDA year-on-year (as defined and adjusted by the agency), despite translation FX losses and E47 million of extraordinary charges related to its transformational initiative « Project Brenntag » it launched in 2020. Without these restructuring costs the company’s EBITDA, as adjusted by Moody’s, would even rise by 4% compared to 2019.In addition, supported by a strong working capital management with an increased working capital turnover, Brenntag managed to deliver a record free cash flow generation (FCF) in the year of over E700 million (as adjusted by Moody’s), which the company partially used to repay debt. As a result, Brenntag’s interest bill meaningfully declined and its Moody’s adjusted gross debt/EBITDA further improved to 2.4x in 2020 (2.3x if adjusted for « Project Brenntag » costs) from 2.9x in 2019, which positions the company strongly in the Baa2 rating category.The upgrade also recognizes the continued strengthening of Brenntag’s business profile, which increases Moody’s tolerance for leverage at a given rating level. Since its IPO in 2010 Brenntag essentially doubled its size through a combination of organic growth and a large number of small to medium sized acquisitions in a highly fragmented market, while maintaining a good profitability and financial discipline in managing growth. In addition, the company has broadened its geographic footprint especially in the faster growing Asian markets, where Brenntag generated already 10% of its operational gross profit in 2020, up from just 1% in 2009. The broader geographic diversification further underpins the good resilience of Brenntag’s business model, as demonstrated by its performance in 2020 when the company’s Asian operations helped offset the weaker US businesses.Moody’s expects that Brenntag will continue expanding its EBITDA over the next 12-18 months, supported by ongoing recovery in some of the industrial end markets affected by the pandemic and despite the continuation of sizeable charges related to « Project Brenntag ». Albeit at a much lower level than in 2020, the agency also expects that Brenntag will be able to deliver positive FCF in the coming two years, despite temporarily rising capital needs related to the initiative.However, while the current credit metrics positions Brenntag strongly in its rating category, Moody’s cautions that the company’s current capital structure, with net leverage (as defined by Brenntag) of 1.3x in 2020, is unlikely to be sustainable. With its 2020 annual results Brenntag reiterated that it targets its net leverage to be around 2.0x, which is a level that it consistently maintained between 2013 and 2019. While this leverage target implies a releveraging risk, Moody’s does not expect that Brenntag’s gross leverage, as adjusted by the agency, will sustainably increase above 3.0x once the company starts to utilize the capacity.Brenntag’s liquidity is good, underpinned by its good FCF generation capabilities. As of the end of 2020 the company reported roughly E730 million of cash and cash equivalents, further supported by predominantly undrawn revolving facilities totaling E940 million maturing in 2024. The facilities have a net leverage covenant with an ample capacity. The next meaningful debt maturity is a roughly $500 million bond with warrants in December 2022. The Baa2 issuer rating with a stable outlook assumes that Brenntag will address the refinancing well ahead of the maturity.ESG CONSIDERATIONSGovernance considerations include Brenntag’s status as a public company and its financial policies that Moody’s considers to be broadly commensurate with a Baa2 rating. Brenntag’s Baa2 issuer rating also recognises its strong operational performance amid the pandemic, which Moody’s considers as a social risk. Environmental risks are not material to the credit quality of Brenntag at this stage.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade would require either an additional substantial strengthening of the company’s business profile, as indicated by meaningful earnings expansion and further geographical diversification coupled with a sustained improvement of Moody’s adjusted operating margin towards 8% (6.1% in 2020); or more conservative financial policy indicating the company’s ability and willingness to keep Moody’s adjusted debt/EBITDA sustainably below 2.0x.Negative pressure could be exerted if Brenntag were to apply more aggressive financial policies, leading to Moody’s adjusted gross debt/EBITDA increasing sustainably towards 3.0x. An operational underperformance indicated by Moody’s adjusted operating margin sustainably below 5% would also be negative for the rating. Any material deterioration in liquidity, for instance due to the company’s inability to address the refinancing in 2022 well ahead of the debt maturities, could also trigger a downgrade.Headquartered in Essen, Germany, Brenntag is the world’s largest independent distributor of chemicals and ingredients, with revenue of around E11.8 billion in 2020. The company offers a broad range of over 10,000 products and services for a wide range of end markets. Although still predominantly active in Europe and North America, Brenntag operated in almost 80 countries worldwide through a wide distribution network of roughly 670 sites and a workforce of more than 17 thousand employees in 2020.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. 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