Rating Action: Moody’s assigns Baa3 rating to IMCD’s bond issued in 2018; stable outlookGlobal Credit Research – 25 Mar 2022Frankfurt am Main, March 25, 2022 — Moody’s Investors Service (“Moody’s”) assigned a Baa3 rating to the guaranteed senior unsecured bond issued by IMCD N.V. (IMCD). The guaranteed senior unsecured bond was issued in 2018. The outlook is stable.RATINGS RATIONALEThe Baa3 rating of the guaranteed senior unsecured bond, in line with IMCD’s Baa3 long-term issuer rating, reflects the instrument’s status as senior unsecured debt in an investment grade type of structure. Sizeable deferred and contingent considerations at operating subsidiaries, representing roughly a third of the entire adjusted debt, would likely rank ahead of bondholders in a restructuring scenario. However, given the relatively long distance to default as indicated by the investment grade rating, Moody’s does not notch the bonds raised at a holding entity level down from the issuer rating.IMCD’s Baa3 long-term issuer rating is primarily supported by the company’s (1) leading positions in the specialty chemical distribution market with good organic growth potential and a global footprint; (2) track record of fairly stable operational performance through economic-cycles owing to its exposure to life science end markets, fairly flexible cost base and a good diversification in terms of products and customers; (3) margins consistently higher than chemical distribution industry peers, because of its focus on higher value-added products and services; (4) track record of consistent and meaningful free cash flow (FCF) generation supported by its asset light business model with low capital spending requirements; and (5) track record of adherence to publicly communicated financial policies, which are largely consistent with an investment grade rating, while also growing organically and through acquisitions.Conversely, IMCD’s (1) small scale in a broader peer group of similarly rated distribution companies; (2) some exposure to cyclical industrial applications; (3) some concentration risk with regards to suppliers and a risk of ongoing consolidation among suppliers and customers in some end markets, which could lead to a loss of business for IMCD; (4) increasing pressure on input costs, in particular labor and largely-outsourced logistics; and (5) a risk of an acceleration in M&A growth or lower discipline in executing the growth strategy, given that IMCD currently operates below its net operating leverage ceiling; constrain the Baa3 rating.ESG CONSIDERATIONSCorporate governance considerations primarily include IMCD’s financial policy that we consider to be largely commensurate with an investment grade rating and the company’s track record of adhering to the policy while managing growth. The company is publicly listed with a broad shareholder base. However, we also note a degree of reliance on key personnel, most notably the CEO and CFO, who have been in their positions essentially since the inception of the company.Environmental risks are not material for the rating of IMCD, considering its asset light business model with largely outsourced logistics. Social risks include the company’s human-capital intensive business model reliant on the availability of a skilled workforce. The company is also exposed to health and safety issues.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGDownward pressure on IMCD’s Baa3 issuer rating could result from (1) inability to maintain good momentum in its operational performance, as indicated by a sustained erosion of its Moody’s adjusted operating margin below 7% (8.9% in 2021); (2) evidence of a more aggressive approach towards external growth, as indicated by Moody’s adjusted gross debt/EBITDA sustainably exceeding 3.25x (2.9x in 2021); (3) a weakening of its cash flow generation capabilities, as indicated by Moody’s adjusted FCF/debt sustainably reducing towards mid-single digit in % terms (9% in 2021); and (4) a weakening of liquidity profile, for instance because of the company’s inability to address its debt-like liabilities well before their maturities.An upgrade of IMCD’s Baa3 issuer rating would primarily require the company further increasing its scale and diversification, while maintaining the industry’s best-in-class profitability. We would also expect financial policies leading to Moody’s adjusted debt/EBITDA sustainably below 2.5x.PRINCIPAL METHODOLOGYThe principal methodology used in this rating was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEHeadquartered in Rotterdam, the Netherlands, IMCD is a leading company in the formulation, sales and distribution of specialty chemicals and ingredients. In 2021, IMCD reported 3.4 billion in revenues, operating in over 50 countries across six continents through a workforce of roughly 3,700. Since its IPO in 2014 the company has been publicly listed, with a diversified shareholder base.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. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. 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IMCD N.V. — Moody’s assigns Baa3 rating to IMCD’s bond issued in 2018; stable outlook
