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Moody's Cuts Crown Holdings (CCK) to 'Ba2'; Concludes Review Following Move to Acquire EMPAQUE

October 7, 2014 3:29 PM EDT

Moody's Investors Service downgraded the corporate family rating of Crown Holdings, Inc. (NYSE: CCK) to Ba2 from Ba1 and the probability of default rating to Ba2-PD from Ba1-PD. Moody's also assigned a Baa3 rating to the proposed $675 million senior secured term loan B due October 2021 of Crown Americas, LLC. In addition, $75m was added onto the exisiting term loan A due December 19, 2018. The ratings outlook is stable. All other instrument ratings are detailed below. Proceeds from the new debt raised will be used to help fund the EMPAQUE acquisition and to pay the fees and expenses associated with the transaction.

This concludes the review for downgrade that was started on September 2, 2014, following the announcement by Crown that it entered into an agreement to acquire EMPAQUE, a leading Mexican manufacturer of aluminum cans and ends, bottle caps and glass bottles for the beverage industry, from Heineken N.V. EMPAQUE, based in Monterrey, Mexico, is a manufacturer of aluminum cans and ends, bottle caps and glass bottles for the beverage industry and a producer of sand for glass making and other applications. At closing, affiliates of Heineken N.V. will enter into long-term supply agreements with EMPAQUE for aluminum cans, bottle caps and glass bottles. The company will pay an enterprise value of $1.225 billion in cash, subject to adjustment. The acquisition is subject to customary closing conditions, including competition authority approval, and is expected to close by year end 2014.

Moody's took the following actions:

Crown Holdings, Inc.

-Downgraded corporate family rating to Ba2 from Ba1

-Downgraded probability of default rating to Ba2-PD from Ba1-PD

Speculative Grade Liquidity Rating, unchanged at SGL-2

Crown Americas, LLC

-Assigned $675 million senior secured Term Loan B due October 2021, Baa3 (LGD 2)

-Downgraded $450 million senior secured US Revolving Credit Facility due December 2018 to Baa3 (LGD 2) from Baa2 (LGD 2)

-Downgraded $875 million senior secured Term Loan A (incl add-on of $75 million) due December 2018 to Baa3 (LGD 2) from Baa2 (LGD 2)

-Downgraded $362 million senior secured Farm Credit Term Loan due December 2019 to Baa3 (LGD 2) from Baa2 (LGD 2)

-Downgraded $700 million 6.25% senior unsecured notes due February 2021 to Ba3 (LGD 5) from Ba2 (LGD 5)

-Downgraded $1,000 million 4.50% senior unsecured notes due January 2023 to Ba3 (LGD 5) from Ba2 (LGD 5)

Crown Cork & Seal Company, Inc.

-Downgraded $63.5 million 7.50% senior unsecured notes due December 2096 to B1 (LGD 6) from Ba3 (LGD 6)

-Downgraded $350 million 7.375% senior unsecured notes due December 2026 to B1 (LGD 6) from Ba3 (LGD 6)

Crown European Holdings S.A.

-Downgraded $700 million European revolving credit facility due December 2018 to Baa3 (LGD 2) from Baa2 (LGD 2)

-Downgraded €700 million senior secured Term Loan A due December 2018 to Baa3 (LGD 2) from Baa2 (LGD 2)

-Downgraded €650 million 4.0% senior unsecured notes due July 2022 to Ba2 (LGD 3) from Ba1 (LGD 3)

Crown Metal Packaging Canada L.P.

-Downgraded $50 million Canadian revolving credit facility due December 2018 to Baa3 (LGD 2) from Baa2 (LGD 2)

The ratings outlook is stable.

The ratings are subject to the receipt and review of final documentation.

RATINGS RATIONALE

The downgrade of Crown's corporate family rating to Ba2 reflects the projected deterioration in credit metrics resulting from the proposed second debt financed acquisition within one year and the increased risk inherent in integrating two sizeable acquisitions at once. Proforma adjusted debt to EBITDA is over 5.0 times (excluding synergies). Although the integration of the two acquisitions will be managed by two different geographic teams (Americas and Europe), both are sizeable organizations and integration risk still increases accordingly. Crown generates strong free cash flow and has pledged all free cash flow to debt reduction over the intermediate term, but metrics are not expected to return to a level commensurate with the Ba1 rating category even in the absence of any negative operating variance.

The ratings outlook is stable. The stable outlook reflects an expectation that Crown will dedicate sufficient free cash flow to debt reduction to improve credit metrics to a level commensurate with the rating category over the intermediate term.

The ratings could be downgraded if Crown fails to improve credit metrics over the intermediate term, there is a deterioration in the cushion under existing financial covenants, and/or a deterioration in the competitive or operating environment. Additionally, a significant acquisition or change in the asbestos liability could also trigger a downgrade. Specifically, the rating could be downgraded if adjusted debt to EBITDA remained above 4.5 times, EBIT interest coverage remained below 3.5 times and/or free cash flow to debt declined below 8.0%.

The ratings could be upgraded if Crown achieves a sustainable improvement in credit metrics within the context of a stable operating and competitive environment and maintains adequate liquidity including sufficient cushion under existing covenants. Specifically, the ratings could be upgraded if adjusted debt to EBITDA declined to below 3.8 times, EBIT interest coverage improves to over 3.7 times, the EBIT margin remains in the double digits, and free cash flow to total debt remains over 9%.

The principal methodology used in these ratings was Global Packaging Manufacturers: Metal, Glass, and Plastic Containers published in June 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.



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