CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BB+/RR4' rating to Ball Corporation's (Ball) three-tranche EUR1.5 billion senior notes offering. The senior notes have maturities in 2020, 2020 and 2023. The Outlook is Stable.
The company intends to use the net proceeds from this offering together with borrowings under the bridge loan agreement or any alternative financing and cash on hand to fund the cash portion of the Rexam acquisition. If the Rexam acquisition is not consummated prior to Nov. 15, 2016, Ball would be required to effect a mandatory redemption of the EUR1.5 billion senior notes offering. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Leverage High Post Close, Material Deleveraging Expected by 2017
The rating considers the expected material increase in Ball's leverage. Pro forma for the Rexam PLC (Rexam) transaction, Fitch expects leverage will be in the mid-4x range depending on the extent of required divestitures. Ball's leverage was 2.8x for the third quarter 2015, which is within the net leverage target for the company. Ball and Rexam's combined free cash flow (FCF) generation should allow the company to rapidly delever, primarily though debt reduction, although Fitch expects some benefit through execution of its synergy targets. During 2017, leverage should further decline to less than 3.5x, back within current negative rating sensitivities. Ball has a strong track record for deleveraging following large transactions, which is an important rating consideration.
Improved Business Risk Profile
Fitch believes the proposed $8.4 billion acquisition of Rexam PLC will allow Ball to materially improve its business risk profile, profitability and financial flexibility owing to the combined capabilities, production efficiencies and scale of these No. 1 and 2 global beverage can manufacturers. Thus, the combination should improve Ball's competitive position to better optimize beverage can price to customers relative to other alternative packaging substrates. The transaction also provides access to additional geographies and new customers that will increase Ball's exposure to growing beverage segments along with the ability to better leverage specialty package technology and efficiencies.
Expected Net Synergies of Combined Company Meaningful
The combined company would have approximately $15 billion in revenue and $2.4 billion in adjusted EBITDA excluding considerations for asset divestitures. Fitch believes Ball should have opportunities to exceed the net synergy target of $300 million on an annual basis. Non-recurring integration costs are estimated at approximately $300 million over the first three years.
Closing Expected in First Half 2016
The transaction is expected to close in the first half of 2016 and is subject to approval from Rexam shareholders, regulatory approvals and customary closing conditions. Ball's shareholders approved the transaction in July 2016. Given the substantial market concentration of the two companies across the U.S., Europe and South America, the regulatory process has been much longer than normal and could result in considerable divestitures if approved. The European Commission, which has extended the review timetable to Jan. 22, 2016, has entered into a period of market testing based on the commitments proposed by Ball and Rexam. Ball has indicated the aggregate global divestitures under discussion with regulators have estimated annual revenue in the range of $2.5 billion, using 2014 foreign currency translation rates.
Maturity Profile Extended
Ball's nearest term maturity, excluding securitization program, revolver debt and uncommitted lines, is $750 million of senior notes due 2022. In March 2015, Ball redeemed $1 billion of senior notes including $500 million due in 2020 and $500 million due in 2021 by drawing on the $3 billion revolving credit facility (RCF). In June 2015, Ball issued $1 billion that was used to pay down the RCF and reduced the outstanding RCF commitment by $750 million.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Required divestures of $2.5 billion in revenue;
--A minimum of a 12-month regulatory review period at time of announcement that should allow Ball to meaningfully build excess cash;
--Ball will not repurchase a material level of shares until net leverage decreases below 3x;
--Margin expansion of at least 150 basis points through 2018 driven by the increased scale and synergy opportunities;
--FCF approaching $1 billion in 2017;
--2016 leverage would increase to the mid-4x range pro forma for the transaction, decreasing to less than 3.5x during 2017.
RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to negative rating include:
--Sustained leverage greater than 3.5x;
--Significant revenue decline/pressure on EBITDA causing a material drop in profitability and lower cash generation;
--Change in financial policy or initiation of material share repurchases before net leverage is reduced below 3x following the close of the proposed acquisition.
Positive: Future developments that may, individually or collectively, lead to positive rating include:
Fitch does not view a ratings upgrade as likely at this time given the expected increase in leverage due to the proposed transaction.
LIQUIDITY
Currently, Ball has very good liquidity provided by the company's FCF, availability under its credit agreement, balance sheet cash and other facilities. Ball bolstered necessary liquidity required for the proposed transaction through an initial $3 billion multicurrency RCF maturing in February 2018 and 3.3 billion pounds multicurrency unsecured bridge term loan facilities. Following the $1 billion June senior notes issuance, Ball reduced the borrowing capacity under the RCF to $2.25 billion. Ball's current credit agreement requires the company to maintain leverage less than four times that will require an amendment or new facility prior to transaction closing.
The lengthy review period should provide Ball and Rexam the opportunity to build cash in anticipation of the transaction closing to strengthen the balance sheets. Cash at the end of the third quarter 2015 was $244 million with $240 million held outside of U.S. Except for approximately $68 million of cash held by the Brazilian Latapack-Ball joint venture, there are no legal or economic restrictions regarding the repatriation of cash held in countries outside the U.S. Following closure of the Brazilian joint venture transaction, Ball will no longer need to hold the higher level of cash in Brazil. Ball has material inter-company loans in Europe and China that allow for the company to transfer cash efficiently.
FCF (net cash provided by operating activities less capital expenditures and dividends) for the LTM period was $390 million. Ball expects to generate approximately $475 million in FCF (Fitch defined) excluding cash costs for the proposed Rexam acquisition during 2015. At Sept. 30, 2015, taking into account outstanding letters of credit and excluding availability under the accounts receivable securitization program, approximately $2.2 billion was available under Ball's RCF.
Ball's securitization agreement, maturing May 2017, typically can vary between $90 million and $140 million depending on the seasonality of the company's business. The receivable securitization totalled $140 million at Sept. 30, 2015. The company has uncommitted, unsecured credit facilities, which Fitch views as a weaker form of liquidity. Ball had approximately $764 million of uncommitted lines available of which $89 million was outstanding and due on demand at the end of the third quarter 2015.
Expected financing for the transaction will include a mix of secured bank loan, unsecured senior notes, a significant equity component and excess cash. In order to mitigate its currency exchange rate risk due to the transaction, Ball entered into collar and option contracts from February 2015, through the expected acquisition closing date with an aggregate notional amount of approximately $3.4 billion at Sept. 30, 2015. Ball also entered into interest rate swaps to minimize its interest rate exposure associated with the anticipated debt issuances.
Fitch expects Ball will finance a substantial portion of the transaction with foreign currencies in various geographies, effectively mitigating the deleveraging risk from trapped foreign cash due to the significant international cash generation of the combined company.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following rating:
--EUR1.5 billion senior unsecured notes 'BB+/RR4'.
Ball's existing ratings are as follows:
--Long-Term IDR 'BB+';
--Senior unsecured debt at 'BB+/RR4';
--$2.25 billion senior secured RCF rated 'BBB-/RR1'.
Date of Relevant Committee: February 18, 2015.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=995540
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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