Fitch Ratings has assigned Azelis Group NV a first-time Long-Term Issuer Default Rating (IDR) of 'BB+' with a Stable Outlook.
It has also assigned Azelis a senior unsecured rating of 'BB+'. The Recovery Rating is 'RR4'.
The IDR balances Azelis's position as a leading specialty chemical distributor with strong diversification of suppliers, customers and products against its higher leverage than other chemical distributor peers. It also captures the company's record of stable profit margins and positive free cash flow (FCF), which supports EBITDA-accretive bolt-on acquisitions.
The Stable Outlook reflects our expectation that Fitch-calculated EBITDA net leverage will remain close to but below 3.5x in 2023-2026, despite our assumption that Azelis will spend more aggressively on acquisitions than chemical distributor peers.
Key Rating Drivers
Global Specialty Distributor: Azelis is the second-largest pure-play specialty chemical distributor by revenue behind IMCD N.V., and is fourth-largest when considering Brenntag's and Univar Solutions, Inc's specialty segments. Its critical mass in a fragmented industry allows Azelis to benefit from long-standing exclusivity contracts with suppliers and a large number of customers globally.
Azelis's market position continues to be strengthened with organic growth in existing markets and small, bolt-on M&A in new and existing markets and geographies. Scale, technical and formulation expertise and geographical breadth provide competitive advantages to specialty chemical distributors such as Azelis versus smaller players when it comes to securing supply contracts with large chemical producers.
Diversified Markets, Stable Margins: Azelis's diversification, variable cost structure and specialty product portfolio results in resilient organic revenues and margins. Moreover, the company benefits from the stability of specialty chemicals demand, and the growth of distribution outsourcing. Fitch assumes the Fitch-calculated EBITDA margin is maintained at around 10% in 2023-2026, slightly lower than in 2022 which we view as an exceptional year.
The company operates in 63 countries in the three main regions, with 60% of revenues derived from life science end-markets including food and nutrition, pharmaceuticals and personal care, which are typically less cyclical than commodity chemical markets. Azelis has highly diversified customers and suppliers, which limits the impact of possible customer or supplier loss. The company's asset-light structure and flexible cost base allows it to reduce costs during downturns, providing further margin resilience.
Deferred Considerations: Fitch includes deferred considerations in its calculation of financial debt, which results in Fitch's net debt/EBITDA metric being 3.2x, higher than 2.2x reported by the company for 2022. These liabilities are reported on the balance sheet and represent delayed M&A outflow. Over half are due within one year, with the remaining balance due by end-2025. While a potential increase in debt should be viewed together with earnings outperformance of the acquired companies, the net impact on leverage metrics can be negative.
Aggressive M&A Expansion: Fitch believes that Azelis will continue to pursue an aggressive acquisition strategy to consolidate a fragmented specialty chemical distribution market. We assume Azelis will spend EUR300 million to EUR400 million (excluding payments of deferred considerations) on bolt-on acquisitions per year in 2023-2026, acquiring an average of EUR30 million to EUR45 million per year of EBITDA annually. There will be additional outflow of deferred considerations between 2023 and 2025.
This represents a more aggressive rate of inorganic growth than peers and will require additional funding to supplement FCF. While bolt-on acquisitions are commonplace in the chemical distribution industry, this prevents material deleveraging from current levels.
Leverage Manageable: We expect Azelis to maintain its EBITDA net leverage at 3.3x to 3.5x in 2023-2026 following its deleveraging from above 6x EBITDA net leverage pre-IPO. Strong performance in 2021 and 2022 combined with incremental EBITDA from bolt-on acquisitions led to EBITDA net leverage falling to 3.2x in 2022. We view the resilience of Azelis's business model as supportive of relatively high leverage for a 'BB+' rating, as the company could deleverage rapidly by scaling down acquisitions, given the earnings growth trajectory and quick realisation of synergies.
Financial Policy Allows Manoeuvrability: The company's public financial policy aims to maintain EBITDA net leverage between 2.5x and 3.0x. In 2022, the ratio was lower than Fitch's calculation, primarily due to the agency's inclusion of deferred considerations and receivables factoring in its debt calculation. This means in a scenario where Azelis grows its deferred consideration balance through aggressive M&A, its reported leverage metrics may remain within the company's financial policy, but breach Fitch's negative sensitivity, which may lead to negative rating action.
Derivation Summary
Azelis's closest Fitch-rated peer is IMCD N.V. (BBB-/Stable). Both companies are pure-play specialty chemical distributors with market-leading positions, a similar growth strategy focused on FCF-funded bolt-on M&A and a comparable diversification of suppliers and customers. Both companies have similar EBITDA and FCF margins, but IMCD has larger EBITDA and lower leverage.
Univar Solutions, Inc (BB+/Positive) is the second-largest global chemical distributor behind Brenntag. It is larger than Azelis but generates about two-thirds of its revenues from commodity chemical sales, exposing it to more volatile prices and lower EBITDA margins. Univar is less geographically diversified, with 75% of revenue from North America in 2022, whereas Azelis's revenue has no notable geographical concentration.
Blue Tree Holdings, Inc. (BB-/Stable) and Reliance Steel & Aluminum Co. (BBB+/Stable) are leaders in North America for polymers and metals, respectively. Both companies operate in a fragmented market like Azelis, although they do not benefit from the greater pricing power of specialty products. Azelis has higher leverage than both companies. We forecast through the cycle net EBITDA leverage to remain under 3.0x and 1.0x for Blue Tree and Reliance, respectively.
Arrow Electronics, Inc. (BBB-/Stable) is a distributor of electronic components and enterprise computing solutions. Its EBITDA is larger than Azelis but it operates in an industry with lower switching costs and value-add for distributors, resulting in lower EBITDA margins of 4%-5%, and higher earnings volatility. Arrow Electronics has significantly lower leverage than Azelis with through the cycle net EBITDA leverage below 2.0x.
Key Assumptions
Organic revenue growth of 2% to 3% per year in 2023 to 2026
EBITDA margin of 11% in 2023 and 10% in 2024-2026
Capex at 0.5% of revenues
EUR300 million to EUR400 million of M&A per year in 2023 to 2026
Dividends in line with the company's stated financial policy
Deferred considerations outstanding at end-2022 repaid over 2023-2025
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA net leverage below 2.5x on a sustained basis
FCF margin above 5% on a sustained basis
Conservative execution of the company's financial policy
Factors that could, individually or collectively, lead to negative rating action/downgrade:
EBITDA net leverage at or above 3.5x on a sustained basis
FCF margin below 2.5% on a sustained basis
Capital allocation prioritising acquisitions and growth over an adherence to a prudent approach to managing leverage
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Sufficient Liquidity for M&A: As at end-2022, Azelis's liquidity stood at EUR518 million, consisting of EUR268 million in cash and a EUR250 million undrawn revolving credit facility. Pro forma for the issuance of Schuldschein tranches, acquisitions closed or signed in early 2023, and for a potential EUR400 million issue, liquidity amounts to about EUR820 million. This will comfortably cover current financial debt and deferred considerations due in 2023 and will supplement FCF to fund M&A in the coming years, although the company may need to raise additional funding.
Potential issuance would diversify Azelis's maturity profile, which is concentrated with EUR1 billion of term loans due in 2026 out of total gross debt of EUR1.8 billion including the proposed issuance.
Issuer Profile
Azelis is a specialty chemicals distributor headquartered in Belgium with operations in 63 countries.
Summary of Financial Adjustments
Lease liabilities are excluded from financial debt; amortisation of right-of-use assets and lease-related interest expense are reclassified as cash operating costs.
Factoring is added to financial debt and trade receivables are increased by the same amount. Cash flow statement is adjusted to reflect changes in factoring use in cash flows from financing activities rather than cash flows from operating activities.
Amortised issuance costs are added back to financial debt to reflect debt amounts payable at maturity.
Date of Relevant Committee
02 March 2023
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
AZELIS GROUP NV 
