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New York, July 26, 2022 -- Moody's Investors Service ("Moody's") assigned a Ba1 rating to Avient Corporation's (Avient) proposed $500 million non-fungible term loan add-on due 2029 and Ba3 rating to the proposed $725 million senior unsecured notes due 2030. The Ba2 Corporate Family Rating (CFR), Ba2-PD Probability of Default Rating (PDR), Ba1 senior secured bank credit facility rating and Ba3 rating on the existing senior unsecured notes are unchanged. The Speculative Liquidity Rating (SGL) SGL-2 is maintained. The outlook is stable.
The proceeds from the proposed financing transactions, in addition to $335 million of cash from the balance sheet, are expected to be applied towards financing the $1.46 billion acquisition of Royal DSM N.V.'s (A3 stable) Protective Materials business (Dyneema).
The assigned ratings are subject to review of the final documentation.
"The proposed term loan add-on and notes that are being issued in order to finance the Dyneema acquisition temporarily stretches credit metrics and add a significant amount of debt; however, the strategic rationale strengthens its business profile and should benefit the company's financial performance long-term," said Domenick R. Fumai, Moody's Vice President and lead analyst for Avient Corporation.
....Senior Secured Term Loan, Assigned Ba1 (LGD2)
....Senior Unsecured Regular Bond/Debenture, Assigned Ba3 (LGD5)
The acquisition is credit neutral as it will add $1.225 billion of debt to the balance sheet and temporarily weaken credit metrics. As a result, adjusted Debt/EBITDA, including Moody's standard adjustments, will increase to approximately 4.5x on a pro forma basis from 3.2x for the LTM period ending March 31, 2022. Moody's expects that Avient will be focused on reducing debt after the acquisition and should be able to return metrics to levels that will fully support the rating over the next 12-18 months. Avient has demonstrated a very good track record of integrating past acquisitions and deleveraging following M&A transactions, including the recent purchase of Clariant Masterbatch in December 2019, which also added a significant amount of debt to the balance sheet. Avient has introduced a net leverage target of 2.2x by 2024. As part of its deleveraging strategy, the company is exploring the sale of its Distribution business and intends to apply after-tax proceeds from the divestiture towards repayment of the $600 million 5.25% senior notes due 2023 and a portion of the new senior secured term loan.
Nonetheless, Moody's believes the strategic rationale for the acquisition will strengthen the company's business profile as once the divestiture of the Distribution business is completed, Avient will be transformed into a pure specialty solutions provider. Dyneema is an ultra-high molecular weight polyethylene (UHMWPE) fiber that is much stronger than steel, yet very light and has a number of applications including personal protection for the military and law enforcement, marine and infrastructure, and consumer products such as apparel and footwear. The addition of Dyneema will complement Avient's existing composites and fiber business, which is expected to see EBITDA grow from $49 million to $180 million in 2022. Dyneema enjoys EBITDA margins in excess of 30%, which should be accretive to EBITDA margins for the composites business.
Avient's Ba2 CFR incorporates the company's enhanced scale, geographic reach and improved business profile following the portfolio repositioning with the sale of its Performance Products and Solutions (PP&S) segment and the subsequent acquisitions of Clariant Masterbatch and Dyneema. Avient has significantly reduced exposure to highly cyclical end markets such as building and construction and substantially expanded its presence in higher growth, less economically sensitive markets such as packaging, healthcare and consumer with pro forma EBITDA entirely generated from specialty formulations. The credit profile is further supported by the company's good liquidity, solid free cash flow generation and strong financial performance despite challenges from higher raw material prices and logistics.
The company's rating is constrained by an acquisitive financial policy that has caused leverage and credit metrics to exceed Moody's threshold for the rating. Although the acquisition of Dyneema and sale of Distribution will significantly reduce the company's exposure to more cyclical end markets, Avient will still have a fairly meaningful concentration to the building and construction, transportation and industrial end markets.
Avient has good liquidity with cash of $563 million as well as $464 million of availability under its revolving credit facility as of March 31, 2022. Moody's expects the company to generate free cash flow of $125 million in 2022 and maintain a minimum of $800 million in liquidity over the next 12 months.
The stable outlook reflects Moody's expectations that the company will execute on deleveraging, and that adjusted financial leverage (Debt/EBITDA) returns towards 3.5x within 24 months from the close of the transaction. Moody's also expects Avient to continue generating solid free cash flow and maintain good liquidity, including balance sheet cash and revolving credit availability, to support operations. The stable outlook further assumes that the Dyneema acquisition is successfully integrated.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade is unlikely at this time given the increase in leverage for the acquisition. Moody's could upgrade the rating if financial leverage is maintained below 3.0x and retained cash flow-to-debt (RCF/Debt) is sustained above 20%. An upgrade would also require a commitment to more conservative financial policies.
Moody's would likely downgrade the rating with expectations for adjusted financial leverage to remain above 4.0x, retained cash flow-to-debt (RCF/Debt) sustained below 15%, or another debt-funded acquisition before restoring the credit metrics. The rating could also be lowered if the company fails to sell the Distribution business and apply the proceeds towards the March 2023 bond maturity.
Moody's considers environmental, social and governance in the company's credit assessment. Avient is exposed to very high environmental risks and high social risks typical for a chemical company. Environmental liabilities based on probable future expenditures are ample relative to the company's size and totaled $124.5 million as of December 31, 2021; however, it may also recover some of the cost from insurers or third parties in some instances. Moody's doesn't view the amount of the liabilities as currently impacting the rating due to their long tail nature. Changes in regulation, estimates or new developments could result in additional costs, which may adversely impact the credit rating.
Avient maintains a sound corporate sustainability program and many of its products have social and environmental benefits such as light-weighting, reducing packaging waste and improving recyclability. Governance risk is commensurate with the industry. Avient is a publicly traded company, with a majority of independent board of directors and SEC financial reporting requirements.
The principal methodology used in these ratings was Chemicals published in June 2022 and available at https://ratings.moodys.com/api/rmc-documents/389870 . Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
Avient Corporation, headquartered in Avon Lake, Ohio, is a global provider of customized polymers and services. Avient develops performance enhancing additives, as well as liquid, fluoropolymer, and silicone colorants. The company operates in three business segments: 1) Color Additives & Inks 2) Specialty Engineered Materials and 3) Distribution. Avient participates in a diverse number of end markets including transportation, industrial, healthcare, consumer and building & construction. Avient reported revenue of $4.95 billion for the last twelve months March 31, 2022.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions .
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Domenick R Fumai Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
Karen Nickerson Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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