Schur Flexibles GmbH Assigned 'B' Ratings On Debt Refinancing; Outlook Revised To Negative On Higher Interest Costs

  • On Nov. 29, 2018, S&P Global Ratings assigned its preliminary 'B' issuer credit and issue ratings to Austria-based flexible plastic packaging producer Schur Flexibles GmbH (Schur), along with a stable outlook.
  • Schur successfully refinanced its debt in December 2018.
  • The final terms of the debt facilities are somewhat more expensive than we anticipated. We now expect negligible free operating cash flow (FOCF) in 2019 versus €6 million previously.
  • As a result, we are assigning our 'B' issuer credit and issue ratings to Schur and revising our outlook to negative from stable.
  • The negative outlook reflects the heightened risk of negative FOCF if Schur fails to achieve substantial improvements in EBITDA.
LONDON (S&P Global Ratings) Feb. 4, 2019--S&P Global Ratings today took the 
rating actions listed above. The outlook revision to negative follows our 
revised expectations of negligible FOCF for 2019 following higher interest 
expenses than we expected in the final terms of the debt structure.

Our forecasts for 2019 assume a material improvement in EBITDA and rely on the 
realization of material synergies and cost savings. Although the absolute rise 
in interest costs is not significant, it puts further pressure on Schur's cash 
generation. In 2019, we expect the overall change in cash after debt 
repayments to be negative. 

The outlook reflects a one-in-three chance that Schur's FOCF could be negative 
over the next 12 months. 
With the exception of interest costs, our base-case assumptions for Schur have 
not changed since we assigned the preliminary rating on Nov. 29, 2019 (see "
Austria-Based Flexible Plastic Packaging Producer Schur Flexibles GmbH 
Assigned Preliminary 'B' Rating; Outlook Stable," published on RatingsDirect). 

We continue to anticipate organic revenue growth of 3% per year and S&P Global 
Ratings-adjusted EBITDA margins of about 11.5%-12.0% for 2019-2020. We 
continue to forecast interest coverage of above 3.0x in 2019 and 2020. Our 
adjusted leverage expectations for 2019 and 2010 remain 5.8x and 5.2x, 

The negative outlook reflects the possibility that we could lower the ratings 
in about the next 12 months if Schur failed to improve its profitability and 
generated negative FOCF. 

We could lower the ratings if Schur experienced unexpected customer losses or 
margin pressures--due to higher input costs or delays in the implementation of 
its cost rationalizations--preventing material deleveraging and resulting in 
negative cash flows. We could also lower the ratings if debt to EBITDA 
exceeded 7.0x, or if Schur faced liquidity concerns or had insufficient 
headroom under its covenants. In addition, we could lower the ratings if 
Schur's financial policy became more aggressive, for example through the 
implementation of dividend recapitalizations.

We could revise the outlook to stable in about the next 12 months if we expect 
Schur to generate modest FOCF on a sustainable basis.

Based in Austria, Schur is the fourth-largest flexible packaging player in 
Europe. We estimate sales and adjusted EBITDA of €512 million and €58 million, 
respectively, for the fiscal year ending Dec. 31, 2019. The company's end 
markets are food (66% of 2017 revenues), health care (11%), specialty products 
(11%), and tobacco (12%). The majority of Schur's revenues relate to 
conversion (including printed and laminated films), and the remainder to 
extrusion (the production of plastic films). Schur focuses on small and 
midsize customers, who make up around 70% of its revenues. 

Schur generates 30% of its revenues from the DACH region (Germany, Austria, 
and Switzerland), 9% from Southern and Central Europe, 8% from the Nordics, 
and 22% from the U.K and Benelux. The remaining revenues (19%) relate to the 
rest of the world, including the U.S. and Asia. Schur's 23 plants are spread 
all over Europe, allowing it to serve customers at short notice. 

  • Eurozone GDP growth of 2.0% in 2018 and 1.7% in 2019, supported by growth in local demand and exports.
  • Annual revenue growth of 3% in 2019 and 2020. In 2019, growth will primarily reflect the full-year contribution of acquisitions, as well as additional sales in the confectionery, tea, and coffee segment. We also assume some revenue growth in pharma, tobacco, cheese, and diary.
  • Adjusted EBITDA margins of 11.5% in 2019 and 12% in 2020, up from 7% in 2018 (on a pro forma basis). This improvement reflects the non-recurrence of the one-off costs that Schur incurred in 2017 and 2018, as well as the benefits of recent initiatives, such as footprint optimization and improvements in product mix.
  • Capital expenditure (capex) of approximately €22 million-€23 million in 2019 and 2020. Two-thirds of this capex relate to maintenance and efficiency.
Based on these assumptions, we arrive at the following credit measures: 
  • Adjusted debt to EBITDA of 5.8x in 2019 and 5.2x in 2020;
  • Funds from operations (FFO) to debt of about 10.5% in 2019 and 12% in 2020;
  • Negligible reported FOCF in 2019 and €7.5 million in 2020; and
  • FFO to cash interest coverage of 3.1x in 2019 and 3.3x in 2020.
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