Fitch Rates Crown's $800MM Issuance 'BB+'
Fitch Ratings has assigned a 'BB+' rating to Crown Americas, LLC's (CA) $800 million senior notes offering due 2023. The Issuer Default Rating (IDR) for Crown Holdings, Inc. and its subsidiaries including CA and Crown European Holdings, SA is 'BB+'. The Rating Outlook is Stable.
The net proceeds of the proposed offering will be mainly used to redeem CA's outstanding $400 million senior notes due 2017 and prepay $300 million of term loans. In addition proceeds will be used to pay associated debt redemption premiums, for payment of related fees and expenses and for general corporate purposes.
Support for Crown's ratings is due to the stable cash flows associated with its contractual commitments, strong market share and cost pass-through despite the current weakening global economic environment. Crown's geographical diversification across both mature and emerging markets with a diverse customer mix results in a balanced revenue stream that should lend greater stability through economic cycles. Fitch currently expects cash generation to increase due to past investments in developing market regions.
Increased beverage can volume demand should continue across the majority of Crown's regions. This should offset volume weakness in European aerosol and specialty packaging and lower U.S. beverage can demand due to promotional related activity that remains below expectations. Supply and demand characteristics should remain firm in Asia with 3.6 billion of capacity expansions expected in 2013 after adding more than 8 billion in capacity the previous two years. However, Crown has pulled back on some projects, reflecting lower demand growth. Past capacity rationalizations and selective-mix realignments by the can industry in its mature markets also provides pricing stability.
Crown's liquidity is very good and includes its sustainable free cash flow (FCF) generation, cash and availability under its revolving facility and securitization programs. At the end of third quarter 2012, Crown had approximately $1 billion in liquidity primarily from the $720 million of availability on its $1.2 billion secured credit facilities that will mature in June 2015. In 2012, Fitch estimates FCF (less minority distributions) should be approximately $250 million. In 2013, Fitch expects significant growth in FCF to over $400 million due to several factors. These include lower growth-related capital going forward, expectations for completed restructuring projects, lower pension contributions, and ramp-up in productivity related to the organic capacity expansions. Crown has indicated initial capital spending estimates of $225 million for 2013 compared to spending expectations of $350 million in 2012 and $401 million in capital spending for 2011.
Crown's near- to medium-term maturities are relatively modest (under $150 million) during the next three years and are primarily related to term loan amortization. Amortization payments for the approximately $900 million in term loan facilities during the next three years are 5%, 10% and 15%. The term loans mature in June 2016. The next significant maturity for Crown's unsecured notes is Euro 500 million due in 2018. Crown also has significant cushion under its present covenants.
Crown has considerable ability to move cash through various mechanisms to fund cash requirements in the U.S. Cash at the end of the third quarter 2012 was $240 million. $215 million of the cash was located outside of the U.S., and more than half of that cash was held by foreign subsidiaries for which earnings are considered indefinitely reinvested. At Sept. 30, 2012, Crown has used the majority of capacity ($190 million) on its $200 million North American securitization facility that matures in March 2013.
The majority of Crown's excess cash is targeted for share repurchase activity since Crown is within company leverage targets. Expectations are for Crown to pace share repurchases to the level of free cash flow. Crown's board of directors has authorized a stock repurchase program of up to $800 million through the end of 2014. Crown also pays out approximately $80 to $85 million in minority distributions but does not have a dividend. Fitch does not expect any significant minority interest acquisitions given Crown's past focus.
Leverage at the end of the third quarter of 2012 was approximately 3.6 times (x). Fitch views the top end of the expected leverage range for the rating below the low to mid 3x range. Credit facility revolver borrowings are higher due to seasonality. Consequently Fitch expects leverage will moderate going forward from reduced revolver borrowings, term loan repayments and increased cash flow generation.
Credit risks which Fitch believes are manageable include the increase in revenue exposure to more volatile, higher-growth emerging markets, exposure to weather and crop disturbances, macro events outside the control of the company, the asbestos liability and pension deficit. In late 2011, Crown took steps to address its growing pension deficit in the U.S. with funding from proceeds of an add-on $350 million term loan. The GAAP funding levels at the end of 2011 for the U.S. and non-U.S plans were 78% and 89% on benefit obligations of $1.5 billion and $3.3 billion respectively.
WHAT COULD TRIGGER A RATING ACTION
Negative: Future developments that may, individually or collectively, lead to negative rating include:
--Crown adopting more aggressive financial policies or operating performance deterioration resulting in material erosion to Crown's credit profile particularly pushing sustained leverage greater than 3.5x;
--Considerable increase in asbestos liability;
--Significant change in operating trends across the emerging market regions;
--Macro events outside the company's control;
--Significantly reduced free cash flow prospects.
Positive: Crown would need to change its current financial policies. In particular, this would require the company to commit to a reduced, more conservative financial leverage policy in the lower 2x range and increased free cash generation relative to adjusted debt. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating upgrade.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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