Fitch Ratings has affirmed the 'BB+' Long-Term Issuer Default Ratings (IDRs) and 'BB+'/'RR4'unsecured ratings of
The Rating Watch Negative has been removed from the IDRs. Proceeds from the term loan, along with
The Negative Outlook reflects the heightened financial risk associated with the transaction. The
KEY RATING DRIVERS
Leveraging Transaction, Deleveraging Capacity: The acquisition of
Solid FCF: Fitch believes that the company will generate solid FCF over the medium term, and believes that it makes sense to redeem the preferred shares within 24 months. Fitch also notes that the company is likely to have the financial flexibility to prepay a portion of its outstanding Term Loan debt. The extent to which the company's Catalysts Technologies business is able to quickly generate cash as volumes return to historical levels will determine the speed with which Grace can return to leverage consistent with a 'BB+' rating.
Specialized Chemical Portfolio: Grace's two business segments offer highly specialized products with high margins and pricing power. Grace has been able to pass through costs to customers, and the catalysts segment has consistently generated EBITDA margins of around 35%, while the Materials Technologies business is in the low 20% range. These margins are on the high end for specialty chemical companies and, though somewhat volatile, are partially insulated by way of solid pass-through rates. In the medium term, Fitch believes that the company will continue to deploy capital in order to build out the Materials Technologies segment.
Refinery Production Drives Growth: Growth in the refining catalysts sub-segment, which accounts for roughly 38% of Grace's revenue, is determined primarily by refinery production utilization levels. Products in this sub-segment have various uses, including cracking hydrocarbon chains in distilled crude oil to produce transportation fuels and maximizing propylene production. These are valuable inputs to a refinery's operations that support the optimization of crack spreads - as such, Fitch expects volumes to track refinery production utilization levels, with high pass-through rates keeping gross margins relatively stable.
DERIVATION SUMMARY
On the spectrum of basic to specialty chemicals, EBITDA margins consistently above 25% put Grace firmly within the 'specialty manufacturer' group. The company is smaller than direct competitor
Like many chemicals peers, Fitch anticipates growth at Grace to roughly track economic activity. Fitch projects Grace to generate consistent FCF margins in the mid-single digits over the forecast period, given low maintenance capex requirements and relatively stable earnings, which is consistent with Fitch's views on Newmarket. Fitch projects
KEY ASSUMPTIONS
Fitch's Key Assumptions Within its Rating Case for the Issuer
Sharp near-term recovery in Catalysts Technologies, with a more modest, longer-dated recovery in Materials Technologies;
EBITDA margins roughly flat throughout the forecast;
Maintenance of a steady dividend and bolt-on M&A in Specialty Catalysts and Materials Technologies prioritized, with redemption of the preferred shares in 2023 and the remainder of excess cash going toward share repurchases. Solidly positive FCF throughout the forecast period;
Total debt with equity credit/operating EBITDA peaks around 4.8x in 2021, falling sharply thereafter as the normalization of refinery output and voluntary debt reduction drives leverage to around 3.4x by 2024.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A shift to a more conservative capital deployment strategy coupled with continued cash generation and earnings stability, leading to total debt with equity credit/operating EBITDA durably below 2.5x and/or FFO-adjusted leverage durably below 3.0x;
Successful completion of Materials Technologies and Specialty Catalysts buildout, resulting in a more conservative capital deployment strategy and a move towards an unsecured capital structure;
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Loss of leading market positions, particularly in the Catalysts segment, leading to total debt with equity credit/operating EBITDA durably above 3.5x and/or FFO-adjusted leverage durably above 4.0x;
Reduced ability to pass through costs to customers, leading to less stable margins and heightened cash flow risk;
More aggressive than anticipated M&A activity, including transformative, credit-unfriendly acquisitions, or shareholder return strategy otherwise incompatible with management's articulated capital deployment policy.
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 '
LIQUIDITY AND DEBT STRUCTURE
Strong Liquidity: Following the
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.
RATING ACTIONSENTITY/DEBT RATING RECOVERY PRIOR
W. R. Grace & Co. - Conn. LTIDR BB + Affirmed BB+
senior secured
LT BBB- New Rating RR1
senior unsecured
LT BB+ Affirmed RR4 BB+
senior secured
LT BBB- Affirmed RR1 BBB-
W. R. Grace & Co. LTIDR BB + Affirmed BB+
VIEW ADDITIONAL RATING DETAILS
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