In This Article:
Rating Action: Moody's assigns B2 to Root Bidco, TLB, RCF; negative outlook
Global Credit Research - 07 Aug 2020
Frankfurt am Main, August 07, 2020 -- Moody's Investors Service, ("Moody's") today assigned a B2 corporate family rating (CFR) and a B2-PD probability of default rating to Root Bidco S.a.r.l. (Root Bidco or Rovensa) and B2 instrument ratings to the senior secured E440 million term loan B (TLB) and the E115 million revolving credit facility (RCF). The outlook is negative. Moody's expects to withdraw all ratings for EUROPEAN CROPS PRODUCTS 2 S.A.R.L. once the transaction closes in late 2020.
RATINGS RATIONALE
Rovensa's B2 CFR reflects the modest scale with annual revenues of E364 million and geographical concentration on the Iberian peninsula where 39% of fiscal year 2020 revenues were generated (FY16: 53%). The company since 2016 has grown from a revenue base of E225 million organically and through acquisitions. In line with the previous M&A track record Moody's assumes that Rovensa remains acquisitive, however the current capital structure leaves limited headroom for debt-funded acquisitions. Likely earn-outs for past acquisitions are viewed as a debt adjustment and are expected to be around E9.2 million at financial close of the transaction. The amount will tail off over time. The continued international expansion of the company, with a focus on existing geographies, including Western and Central Europe, the Americas and the APAC and MENA regions, will further lower the geographical exposure to the Iberian peninsula. The increased regional diversification into markets that Rovensa already knows should reduce volatility from adverse weather events that may have a negative impact on demand for Rovensa's products.
Rovensa has a broad and diversified portfolio of products across specialty crop nutrition (SCN), off-patent crop protection (CP) and biological crop protection (BCP). SCN is R&D-intensive, supported by 40 researchers, fast-growing and has an EBITDA margin in the 25%-30% range. CP has an EBITDA margin of around 20%. This is lower than that of its multinational peers Bayer AG (Baa1 stable), Syngenta AG (Ba2 stable) and E.I. du Pont de Nemours and Company (A3 stable) whose R&D expenditure is higher given their focus on patent products, where Rovensa is focused on post-patent products only, which have lower margins but require lower R&D expenditure. Rovensa has built a significant business in BCP through M&A. BCP product demand is expected to lead to higher than market growth, benefitting from positive environmental and dietary trends. This division generates EBITDA margins in the 25-30% range. Rovensa benefits from entrenched domestic leadership positions across its portfolio.
The ownership change will result in higher Moody's-adjusted debt of around E116 million. Pro-forma gross leverage will be about 6.4x, which leaves the B2 CFR initially weakly positioned. This assumes E440.0 million of the new TLB, closing utilization of factoring programmes of E40.0 million, leases of E21.0 million and E9.2 million for earn-outs related to past acquisitions. A shareholder loan, outside the restricted group, has been classified as equity by Moody's. Future EBITDA will be supported by volume growth, expansion of the margin and incremental contributions from further acquisitions. Moody's estimates FY21 EBITDA of around E84.0 million, resulting in debt/EBITDA of around 6.2x. The current rating doesn't factor in dividend payments.
Rovensa's liquidity is adequate. Starting cash at closing of the transaction will be close to nil and the company will thus rely on cash inflows in the seasonally stronger quarters Q2 through to Q4 to build up its cash balance. Rovensa will have access to a E115 million revolving credit facility (RCF) to cover working cash, seasonal working capital built-up and capital spending that amounts to about E25 million annually. The first fiscal quarter -- July to September -- is seasonally the weakest with negative funds from operations. Rovensa typically records seasonally strong second and fourth quarters following the planting campaigns of its customers. The transaction is expected to close during the second fiscal quarter.
SOCIAL AND GOVERNANCE CONSIDERATIONS
Rovensa is currently owned by private equity firm Bridgepoint and will be sold to funds managed by private equity firm Partners Group. Typically private equity owned companies' financial strategy is characterized by high financial leverage and shareholder friendly policies such as the pursuit of acquisitive growth. Moody's considers Rovensa's historical approach to debt financed acquisitions to be aggressive and the risks related to this strategy are reflected in the negative outlook. Bridgepoint has been invited to re-invest by Partners Group and is expected to take an equity stake of 50%, subject to internal approvals. The strategy under the new ownership structure will be executed by existing management and hence expected to be consistent with the current strategy that includes further internationalization of the business and bolt-on acquisitions.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The impact of the coronavirus on Rovensa has so far been fairly limited with management estimating a one-off EBITDA impact of around E5.0 million (not adjusted by Moody's) due to logistical limitations at the peak of the outbreak and three active ingredient shortages. Given the essential role Rovensa plays in the overall food chain, Moody's believes that the agricultural sector and crop nutrition and protection companies supplying farmers are more resilient on a relative basis when compared to other chemical companies, such as commodity chemical companies.
STRUCTURAL CONSIDERATIONS
The senior secured E440 million term loan B (TLB) and the E115 million RCF rank pari passu. Both facilities benefit from guarantors representing at least 80% of consolidated group EBITDA. Debt instrument ratings of B2 are aligned with the B2 CFR as they present the majority of indebtedness in the structure apart from leases and trade claims.
RATIONALE FOR NEGATIVE OUTLOOK
The negative outlook on Rovensa's ratings reflects the weak positioning of the rating within the B2 rating category. It also balances Rovensa's higher amount of debt, about E116 million on a Moody's-adjusted basis, at closing of the transaction, earn-outs for recent acquisitions and the expectation that Rovensa will continue with bolt-on acquisitions. While Rovensa's operating performance has been relatively robust over recent months, the negative outlook further reflects ongoing macroeconomic risks, including those that have resulted from the coronavirus outbreak. This could negatively impact the expected performance improvements over the next quarters, although Rovensa has so far not as severely been affected as other corporates due to Rovensa's essential role in the food supply chain and exposure to robust end markets.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While unlikely at this juncture, we may consider a rating upgrade in the context of further significant expansion and geographical diversification of Rovensa's revenue base, as well as EBITDA growth, which would allow the group to use substantial FCF to reduce debt, so that its Moody's-adjusted total debt/EBITDA trends towards 4.0x on a sustained basis. Rovensa's ratings could come under negative pressure should the company fail to grow EBITDA and its total debt/EBITDA remain above 6.0x for a prolonged period and/or the group generates negative FCF, leading to a deterioration in its liquidity.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
COMPANY PROFILE
Root Bidco S.a.r.l. is the parent of companies trading under the name Rovensa. The company provides crop lifecycle management solutions spanning specialty crop nutrition (SCN), off-patent crop protection and biocontrol, with a particular focus on high-value cash crops, such as fruit and vegetable products, vine, and flowers. In January 2017, Bridgepoint acquired Rovensa (formerly known as Sapec Agro) and in June 2020 announced that it would sell the company to funds managed by Partners Group for an enterprise value of around E1.0 billion. Partners Group have invited Bridgepoint to take a 50% stake in the new structure. The transaction is expected to close in late 2020. Rovensa in its fiscal year 2019/20 ending 30 June 2020 generated preliminary revenues of E364 million.
REGULATORY DISCLOSURES
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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Moritz Melsbach Asst Vice President - Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Matthias Hellstern MD - Corporate Finance Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454
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