We have upgraded from SR3 to SR2 our short-term rating for Verallia’s NEU CP instrument for an amount of up to €400m. Based in Paris, France, Verallia is the world’s No. 3 manufacturer of glass packaging. The group produces a wide range of glass bottles, containers and jars for around 10,000 customers, ranging from local wine producers to global food and beverage brands. Verallia has been listed on Euronext Paris since October 2019, although the company is still owned c. 28.37% by its former outright owner private equity outfit Horizon Investment Holdings, an affiliate of Apollo Global Management (since the spin-off from Saint-Gobain in 2015), along with BWSA (24.34%), BPI France (7.45%), employees (c. 3.21%), and a free-float of c. 34.92%. The one notch upgrade in our rating results from the demonstrated resilience of Verallia’s business model, as reflected in the solid 2020 financial performance, which leads us to improve, within our rating grid, our considerations regarding industry demand, the business position, and the financial policy of the group.
Verallia has a special focus on wine and spirits (around 60% of sales), being the No. 1 glass packager in Europe. This premium positioning entails higher margins than competitors while reducing substitution risks from other containers like metal and plastic. Over the long term, we expect Verallia to continue to benefit from its positioning, with increasing exports from European wine and spirits producers, as well as from its presence in Latin America, including Brazil, Argentina and Chile. Verallia’s market shares are quite well protected by high barriers for new entrants, as well as by a highly diversified portfolio of clients with strong and longstanding relationships.
The glass packaging industry is highly capital-intensive. The company’s activities necessitate high recurring CapEx (8% of sales or around €200m per year) to maintain the quality of its assets. Furthermore, it needs a significant amount of raw materials, including recycled glass and silica sand, as well as energy, the prices for which tend to be volatile. However, we would estimate that the group is satisfactorily hedged against energy price fluctuations. Verallia has a good ability to pass on cost inflation to clients. Given the presence of the group in Latam and Russia, its results may be negatively affected by adverse currency fluctuations.
Despite the coronavirus, we deem that the financial performance of Verallia was very resilient in 2020 with reported revenues down by only 1.9% and volume driving revenues down by some c. 1.4%. The lower volumes of sparkling wines and spirits bottles were partially offset by growing volumes in food jars. The organic growth of the group excluding Argentina, a country with significant inflation, reached + 0.8%. In terms of profitability, the EBITDA margin increased by some 88 basis points to 24.7%. Free cash-flow generation was solid - reaching c. €285m - and represented some 16% of our net adjusted debt in FY20 (vs 8% for FY19) with some 4% (or €71m) stemming from working capital net inflow.
Our SR2 rating is constrained by Verallia’s limited geographical diversification with France, Italy, Germany and Spain contributing c. 81% of consolidated revenues in FY20 and Latam broadly 9%. Furthermore, the rating is constrained by moderately high leverage, with Qivalio’s net adjusted debt-to-EBITDA ratio of 2.8x (vs 2.0x as reported by the company) at the end of December 2020. This position stems from Verallia’s former private ownership and should be seen in the context of a capital-intensive industry characterized by high maintenance CapEx. However, Verallia has a satisfactory track record as highlighted by its gradual improvement in profitability, with EBITDAR margin increasing from 20.4% in FY16 to 24.7% in FY20. The improvement in profitability goes along with a decrease in indebtedness despite significant CapEx; Qivalio’s net adjusted leverage ratio for Verallia has decreased from 5.0x in FY16. We expect Verallia to continue to generate positive free cash-flow after dividends over 2021-2023 (our forecast period) and to maintain a Qivalio net adjusted leverage ratio below 3.0x after 2020, as well as to comply with its medium-term guidance of a reported net leverage between 2.0x and 3.0x.
The capital structure of Verallia is rather straightforward as it is mostly composed of a €1.5bn term loan and a €500m RCF (undrawn as of end-December 2020), both maturing in October 2024.
In 1H20, Verallia implemented a 1Y+6 months €250m RCF (fully undrawn at end-December 2020) with the aim of strengthening its liquidity and to respond to any lower demand under its €400m NEU CP program (€146m drawn at end-December 2020 vs €188m at end-December 2019) entailed by the coronavirus pandemic. The company has not taken any state-guaranteed loan.
At end-2020, gross debt amounted to roughly €1.8bn and net reported debt to €1.3bn. Our net adjusted debt amounts to c. €1.8bn, with adjustments mostly related to the off-balance sheet factoring program and pension deficits.
The liquidity profile is excellent. This is driven by large undrawn revolving credit facilities, the long-term debt maturity profile, high cash on balance sheet, and our expectation that Verallia will continue to generate strong free cash-flow. The liquidity is, however, subject to significant concentration, due to the maturity of the term loan, even though we currently assess it as sufficiently distant.
Credit outlook: Stable
Our Stable outlook reflects our expectation that credit metrics will be maintained at a broadly similar level over the next twelve months.
Verallia is in the lower range of the SR2 category. An upgrade to SR1 is not likely to be derived from improvement in credit metrics, but rather by significant improvement in Verallia’s business profile with a combination of greater size, and better geographic and product diversification. In the short-to-medium term, this would be most likely to result from a transformative acquisition which would probably need a capital increase to offset the deterioration in credit metrics stemming from a debt-funded acquisition.
A downgrade to SR3 could be triggered in the event credit metrics deteriorate, which could stem from lower-than-expected profitability, significant share buyback or extraordinary dividends, M&A operations, or a mix of these events. A downgrade could also be required in the event liquidity deteriorates significantly.
Report review on NEU CP instrument rating
Rating initiation: SR3 on 17 July 2018.
Last rating action: affirmed at SR3 on 21 October 2020.
Rating nature: Solicited short-term instrument rating
With rated entity or related third party participation: Yes (the rating report was published after having been reviewed by the issuer).
With access to internal documents: No
With access to management: Yes
Name of the rating committee chair: Marc Pierron, Senior Credit Analyst.
Material sources used to support the rating decision:
Annual and quarterly reports
IPO registration document
Discussions with Verallia management
Limitation of the Rating action:
Qivalio believes the quality and quantity of information available on the rated entity is sufficient to provide a rating.
Qivalio has no obligation to audit or verify the accuracy of data provided.
Our methodologies used for this rating are available at:
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