CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term debt ratings of Ball Corporation. The Rating Outlook is Stable.
KEY RATING DRIVERS
The rating affirmation incorporates the company's diversified sources of cash flow generation, stable credit metrics, leading market positions in the majority of its product categories/market segments, and expectations for increased global beverage volume in the packaging end-markets over the longer-term. Specialty can growth with its higher margins will continue to be an important and growing offset to the structural decline experienced with the 12-ounce carbonated soft drink (CSD) can. In North America, specialty cans now represent more than 20% of Ball's beverage can mix.
During the past several years, Ball has demonstrated discipline by taking steps to reduce overcapacity, remove fixed costs, increase productivity, and rebalance its can mix. Consequently, Ball's on-going operational focus across its strategic footprint has resulted in consistent operating performance with growing EBIT trends absent business restructuring costs.
Ball has very good liquidity resulting from cash generation, availability under its credit agreement and balance sheet cash. Free cash flow (FCF) (cash from operations less capital spending less dividend) for 2013 was approximately $375 million. Ball expects FCF of approximately $550 million before dividend or about $475 million after dividend, which Fitch believes is a reasonable expectation for 2014. Cost restructuring benefits, lower cash pension contributions, reduced interest costs and improved working capital are key drivers for increased FCF expectations. At the end of 2013, Ball had cash of $416 million and $904 million of availability on its $1 billion multicurrency revolver that matures in 2018 with significant covenant flexibility and basket capacity. Ball also has material inter-company loans in Europe and China that allow for the company to transfer cash efficiently.
Ball has additional liquidity through a U.S. accounts receivable securitization program that matures in 2014. Ball's securitization agreement typically can vary between $110 million and $225 million depending on the seasonality of the company's business. At the end of 2013, the securitization agreement did not have any receivables that were sold. Ball also has uncommitted, unsecured credit facilities, which Fitch views as a weaker form of liquidity. At the end of the third quarter 2013, Ball had up to $668 million of uncommitted lines available of which $58 million was outstanding and due on demand.
Near-term maturities are modest during the next four years with no more than $150 million in any given year. The term loans which mature in 2018 currently have $268 million outstanding. The next maturity with its senior notes is $500 million of 6.75% notes due in 2020 that are callable in March 2015. Leverage at the end of 2013 was 3.1x. For 2014, Fitch expects leverage will decrease to the upper 2x range following the January debt repayment absent considerations for a large unplanned acquisition.
Fitch believes Ball maintains an appropriate balance between returning capital to shareholders, investing in the strategic requirements of the business and maintaining a solid financial profile. Since Ball is within its financial net leverage target of 2.5x to 3.0x, the company has significant flexibility when deploying its excess capital. In 2013, Ball spent approximately $175 million to $200 million on growth-related capital and almost $400 million on net share repurchases. Fitch expects share repurchase activity and dividends should approximate FCF generation.
Risks are reflected in the rating and, in Fitch's opinion, are quite manageable. These include the acquisitive nature of the company, the risks inherent within the packaging segment including structural declines of the 12-ounce can, emerging markets risk, and revenue/customer concentration.
Ball's largest segment, the U.S. beverage can, along with the food-can segment represents mature business operations subject to volume-related pressure. In the U.S., Ball is managing the volume declines for 12-ounce containers with growing demand for higher-margin specialty cans. Ball's primary risk, in Fitch's view, is if 12-ounce CSD declines accelerate and specialty cans only partially offset the decline, resulting in greater pressure on operating income.
In China, Ball's leading market share positions the company to capture its share of market growth driven in part by can conversions in these less-penetrated markets. However, profitability will be challenged for at least the next couple of years due to a highly fragmented can industry with public, private and governmental ownership. As a result, material overcapacity has resulted in on-going pricing pressure. Fitch expects this should resolve over the longer term as can demand continues to grow and consolidation opportunities rationalize the smaller and more marginal manufacturers.
Negative: Future developments that may, individually or collectively, lead to negative rating include:
--Significant revenue decline/pressure on EBITDA causing sustained leverage to increase greater 3.5x;
--Large debt-financed acquisition that would significantly increase leverage;
--Change in financial policy or aggressive share repurchase.
Positive: Future developments that may, individually or collectively, lead to positive rating include:
--Commitment to a leverage target less than 2.5x;
--Margin expansion through improved operating performance;
--Sustained increase in FCF as a percent of debt greater than 10%.
Fitch has affirmed the following ratings:
--IDR at 'BB+';
--Senior Unsecured Debt at 'BB+';
--Senior Secured Credit Facility at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage