Charter NEX US Inc. And Subsidiary Outlook Revised To Stable From Negative On Acquisition; Ratings Affirmed

  • U.S.-based specialty films packaging producer Charter NEX US Inc. (CNEX) is acquiring Next Generation Films Inc. (NextGen).
  • We revised our outlook on Charter NEX US Inc. and its subsidiary Charter NEX US Holdings Inc. to stable from negative and affirmed our 'B' issuer credit rating on the company.
  • We affirmed the 'B' issue-level rating on the company's existing $610 million first-lien term loan and existing $75 million revolving credit facility (to be upsized to $100 million as part of this transaction).
  • We assigned our 'B' issue-level rating and '3' recovery rating to the company's proposed $660 million incremental first-lien term loan.
  • The company is also upsizing its existing revolver to $100 million from $75 million and issuing $50 million in senior unsecured notes (unrated).
  • The stable outlook reflects our expectation for adjusted debt to EBTIDA to fall below 7x in the next 12 months through favorable operating trends.
NEW YORK (S&P Global Ratings) April 24, 2019--S&P Global Ratings today took the rating actions listed above. The acquisition of NextGen modestly improves its competitive advantage, increasing its market share and expanding customer diversification and scale in specialty films. We expect improving operating trends, leverage decreasing below 7x in the next 12 months, and decent free cash flow generation, which support the outlook revision to stable from negative. While we expect leverage to be elevated initially at about 8x, we expect the incremental EBITDA from NextGen and healthy organic growth should support a decrease in leverage to below 7x in the next 12 months.
After initially high leverage, we expect the incremental EBITDA from NextGen and healthy organic growth should support a decrease in leverage in the next 12 months. Based on our forecasts, we believe the adjusted debt to EBTIDA should fall below 7x in that period.
We could lower our ratings on CNEX if its adjusted debt to EBITDA remains above 7x on a sustained basis with no clear prospects for improvement. This could occur if the company fails to integrate and realize synergies of this acquisition and additional capacity expansion does not translate into increased EBITDA. We could also lower our ratings if the company pursues a more aggressive financial policy—such as a debt-funded dividend to its owners--that prevents it from improving leverage below 7x in the next 12 months.
While unlikely, we could raise the ratings on CNEX if the company's credit metrics strengthen materially over the next year and we believe that its financial sponsors are committed to maintaining a less aggressive financial policy with sustained adjusted debt to EBITDA below 5x.
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