Innovative Water Care Global Corp. Rated 'B', Stable Outlook Post Carve-Out From Lonza Group; Financial Sponsor Owned

  • Georgia-based pool chemicals manufacturer Innovative Water Care Global Corp. (IWC) is being carved out from Europe-based Lonza Group Ltd. and acquired by financial sponsors Platinum Equity LLC (not rated).
  • We estimate pro forma debt to EBITDA above 6.5x post the completion of transaction, which will likely improve closer to mid-5.0x over the next 12 months driven by a material improvement in EBITDA from newly contracted business and lower operating expenses.
  • We assigned a 'B' issuer credit rating and stable outlook to IWC. At the same time, we assigned a 'B' issue-level rating with a '3' recovery rating to the company's proposed $350 million first-lien term loan maturing 2026, and a 'B-' issue-level rating with a '5' recovery rating to the company's proposed $100 million second-lien term loan maturing 2027.
  • The stable outlook reflects our expectation that there will be significant growth in EBITDA from a combination of lower administrative costs as a stand-alone operating entity and new business from key customers, resulting in debt to EBITDA closer the mid-5x area within a year of the transaction close.

NEW YORK (S&P Global Ratings) Feb. 4, 2019—S&P Global Ratings today took the 
rating actions listed above. Our 'B' issuer credit rating reflects our 
expectation that Innovative Water Care Global Corp. will reduce its adjusted 
debt to EBITDA to the mid-5x range within one year of the transaction from pro 
forma leverage just over 6.5x at fiscal year-end 2018. Our ratings assessment 
also reflects IWC's narrow product focus, largely fragmented niche pool 
chemicals segment of the market, high customer concentration, but a favorable 
cost-sourcing footprint, strong supplier relationships, and relatively stable 
demand compared with the more cyclical new pool construction segment of the 

The stable outlook reflects our expectation that IWC will be able to recoup 
its market-share loss over the past two years driven by new contract wins with 
key customers, coupled with low- to mid-single-digit organic sales growth 
given the favorable outlook on the largely stable pool-chemicals market, which 
should result in significant EBITDA growth. Coupled with lower stand-alone 
operating costs, this should lead debt to EBITDA approaching the mid-5x area 
within a year of the transaction close compared with pro forma leverage of 
just over 6.5x. 

We could downgrade IWC if the anticipated rebound in EBITDA in fiscal 2019 
does not materialize or if the company incurs unforeseen increases in 
stand-alone implementation costs that materially weaken its free cash flow 
generation, resulting in debt to EBITDA remaining above 6.5x. We currently 
expect double-digit year-over-year EBITDA growth  from a combination of 
high-single-digit top-line growth from its new customer contracts and much 
lower stand-alone costs. We estimate leverage could remain above 6.5x if pro 
forma EBITDA grows only by mid-single digits over the next year and 
significant cost overruns lead to higher debt levels.

An upgrade is unlikely over the next 12 to 24 months given the company's high 
leverage, narrow product focus, customer concentration, and private-equity 
sponsor ownership. We could consider a higher rating over the next several 
years if the company can significantly increase its scale and further 
diversify its product lines (particularly in the aftermarket segment), while 
maintaining leverage below 5x and generating free cash flow in excess of $10 
million. Additionally, we would need strong evidence of a commitment to a 
financial policy consistent with maintaining leverage below 5x.
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