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Research: Rating Action: Moody’s changes Italmatch’s outlook to positive; affirms Caa1 rating

Stockholm, July 11, 2022 — Moody’s Investors Service (“Moody’s”)  changed the outlook on Italmatch Chemicals S.p.A. (Italmatch or the company) to positive from stable. Concurrently, Moody’s affirmed Italmatch’s Caa1 corporate family rating (CFR) and Caa1-PD probability of default rating (PDR), as well as the Caa1 rating of Italmatch’s senior secured floating rate notes (FRN).

A full list of affected rating can be found at the end of this press release.

RATINGS RATIONALE

Today’s rating action reflects the significant improvements in Italmatch’s credit metrics over the last twelve months and Moody’s expectations for Italmatch to maintain solid credit metrics for the rating category in 2022 on the back of favorable pricing and volume growth. Though Moody’s expects material improvements in Italmatch’s gross leverage in 2022 because of strong operating results in the first half of 2022, there are uncertainties and risks around earnings in 2023. As of end of March 2022, the company’s liquidity profile is adequate with €39 million of cash on balance and €69.5 million available under its €107 million super senior revolving credit facility (RCF) which matures in April 2024. Its nearest debt maturity occurs in September 2024, when the €650 million senior secured floating rate notes mature. The company is considering a refinancing of its €650 million of debt, subject to certain market conditions, which would likely lead to higher interest costs based on Moody’s assumptions.

The first quarter of 2022 was exceptionally strong and Italmatch’s management adjusted EBITDA doubled to €44 million from €22 million during the year-earlier period, mainly because of increased pricing power and higher volumes. EBITDA growth supported a reduction in Moody’s estimated adjusted gross leverage to 6.1x (6.9x excluding unrealized forex gains on intragroup loans) for the last twelve months ended in March 2022 from 7.1x (9.1x excluding unrealized forex gains on intragroup loans) in 2021. Higher selling prices more than offset increased raw material and energy costs. Italmatch’s increased pricing power results mainly from the tight supply conditions in the market, its ability to secure key raw materials which provides reliability for its customers and the company’s strong competitive position in specialty niches.

Moody’s anticipates earnings to moderate in the second half of the year 2022 compared to the first half of the year 2022, although EBITDA in 2022 is likely to be above historical levels on a like-for-like basis. Nevertheless, Moody’s sees downside risk to the company’s ability to maintain EBITDA generation at the currently very strong  levels in 2023, especially in a scenario with a softer macroeconomic environment and rising energy costs. Furthermore, Moody’s expects that the company will continue to incur non-recurring costs, including restructuring expenses and consulting fees, albeit at a lower level than during the period of 2019 to 2021, where management adjustments and non-recurring items ranged from €15 million to €17 million per annum. According to the company, supply in the market has been reduced because smaller competitors struggle to operate in the current industry environment given supply chain disruptions, higher environmental regulation, higher raw material costs and raw material shortages. Additionally, Italmatch expects continued strong demand across its main end-markets. While these factors argue in favor for a continued positive trajectory even after 2022, current macroeconomic uncertainties limit earnings’ visibility for the company and the sector. Potential gas curtailment in Europe represents additional downside risks to the company’s performance, partly mitigated by energy surcharge and a contingency plan for all the European plants (switch from gas to other fuels).

With the publication of Q1 results, management communicated that they are evaluating a potential refinancing of the €650 million senior secured floating rate notes subject to market conditions. Moody believes that a refinancing will likely lead to higher interest costs. The company might need to raise additional debt or draw under its revolving credit facility to finance upfront costs associated with a refinancing transaction.

RATIONALE FOR POSITIVE OUTLOOK

The positive outlook reflects the expectation that credit metrics will remain solid for the rating category in 2022 and that Italmatch will maintain an adequate liquidity position. The positive outlook highlights the fact that a continued solid operating trajectory, and better visibility on the likelihood of a refinancing and future interest cost could result in an upgrade. An upgrade would also require a liquidity profile commensurate with a higher rating.

LIQUIDTY PROFILE

Moody’s views Italmatch’s liquidity as adequate. As of end March 2022, the company had around €39 million of cash and cash equivalents on balance sheet, and €69.5 million available under its €107 million super senior RCF. In combination with forecasted funds from operations over the next 12 months, those sources will be sufficient to meet its working capital requirements, capex and short-term debt. In addition, the company has access to different non-recourse factoring programs. Moody’s debt calculations for Italmatch do not include non-recourse factoring.

ESG CONSIDERATIONS

Moody’s views the chemical industry as being exposed to very high environmental risks. In particular, regulatory changes, including banning of products, could impact the company’s earnings and cash flow profile.

Moody’s governance assessment for Italmatch incorporates its highly leveraged capital structure, reflecting high risk tolerance of its private equity owners. The private equity business model typically involves an aggressive financial policy and a highly leveraged capital structure to extract value.

STRUCTURAL CONSIDERATIONS

The Caa1 instrument rating for the €650 million senior secured floating rate notes (FRNs) due September 2024 is in line with the CFR. In Moody’s waterfall assessment, the super senior RCF and trade claims rank ahead of the FRNs. The security package of senior FRNs comprises a pledge over the company´s bank accounts and intercompany receivables and benefits from upstream guarantees from most of the group’s operating subsidiaries.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody’s could upgrade Italmatch’s rating if Moody’s adjusted leverage would remain below 7x debt-to-EBITDA, while the company builds a track record of maintaining EBITDA generation at current levels, and EBIT/Interest Expense remains comfortably above 1x on a sustainable basis. An upgrade furthermore would require the company to maintain an adequate liquidity profile and to extend the debt maturity profile.

Moody’s could downgrade ratings if Italmatch’s liquidity or its operating performance deteriorated. A downgrade would also be likely with a lack of progress in refinancing upcoming maturities well ahead of the due date.

LIST OF AFFECTED RATINGS

..Issuer: Italmatch Chemicals S.p.A.

Affirmations:

…. LT Corporate Family Rating, Affirmed Caa1

…. Probability of Default Rating, Affirmed Caa1-PD

….Senior Secured Regular Bond/Debenture, Affirmed Caa1

Outlook Actions:

….Outlook, Changed To Positive From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Chemicals published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389870. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Genova, Italy, Italmatch Chemicals S.p.A (Italmatch) is a global chemical additives manufacturer, with leadership in lubricants, water & oil treatments, detergents and plastics additives. The company operates through four distinct business divisions: Advanced Water Solutions, Lubricant Performance Additives, Flame Retardants and Plastic Additives and Performance Products and Personal Care. In 2021, the company generated revenues of around €600 million and company-adjusted EBITDA of €104 million. Since late 2018, Italmatch is majority owned by Bain Capital.

REGULATORY DISCLOSURES

For 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 on https://ratings.moodys.com/rating-definitions.

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. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.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 ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Frederic Massard
Analyst
Corporate Finance Group
Moody’s Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Karen Berckmann, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm, 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

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