Moody's Places Ratings of Berry Plastics Group (BERY) on Review for Downgrade
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Moody's Investors Service, ("Moody's") placed Berry Plastics Group, Inc.'s (NYSE: BERY) B1 corporate family rating, B1-PD probability of default rating, and all other instrument ratings under review for downgrade. The review follows Berry's announcement today that it entered into a definitive merger agreement to acquire all of the outstanding shares of AEP in a cash and stock transaction.
Aggregate consideration for the acquisition will be $765 million, including AEP's net debt. Each AEP shareholder will elect to receive either $110 in cash or 2.5011 shares of Berry common stock per AEP share in the transaction, subject to an overall 50/50 proration to ensure that 50% of the total outstanding AEP shares are exchanged for the cash consideration. Upon closing, AEP shareholders will own approximately 5 percent of Berry on a fully diluted basis. Based on Berry's closing stock price on August 23, 2016, the date the exchange ratio was set, the blended value of the merger consideration represented $110 per AEP share. Based on yesterday's closing price of Berry's stock, the blended value of the merger consideration represented $109.12 per AEP share. Berry has advised that the cash component is supported by a committed incremental term loan. This transaction is subject to customary closing conditions and is expected to close by December 2016.
Moody's placed the following ratings under review for downgrade:
Berry Plastics Group, Inc.
o B1 corporate family rating
o B1-PD probability of default rating
Berry Plastics Corporation
o Ba3/LGD3 1st Lien Senior Secured Term Loans
o B3/LGD5 Second Priority Senior Secured Notes
Berry Plastics Group, Inc.
The SGL-2 Speculative Grade Liquidity remains unchanged.
The review for downgrade reflects the integration and operating risk inherent in Berry's plan to undertake another significant acquisition within the 12 months of the largest acquisition in the company's history. While the acquisition of AEP is approximately leverage neutral before synergies (LTM and depending upon financing), the acquisition entails further integration and operating risk while leverage remains above the rating trigger specified in the credit opinion dated September 10, 2015.
Moody's review will focus on the potential synergies, integration plan and plan to deleverage as well as the status of the integration for the recent acquisition. The corporate family rating downgrade, if any, is expected to be no more than one notch.
Berry's B1 Corporate Family Rating reflects the company's exposure to more cyclical end markets, certain weaknesses in contract structures with customers and a high percentage of commodity products. The rating also reflects the stretched credit metrics pro forma for the AVINTIV acquisition and the fragmented and competitive industry structure. Berry will also have a significant unhedged foreign currency exposure pro forma and all debt will be denominated in US dollars.
Strengths in Berry's competitive profile include its scale, concentration of sales in relatively more stable end markets and good liquidity. The company's strengths also include a strong competitive position in rigid plastic containers and continued focus on producing higher margin products and pruning lower margin business.
The ratings could be upgraded if the company sustainably improves credit metrics within the context of a stable operating and competitive environment while maintaining good liquidity. An upgrade would also be dependent upon less aggressive financial and acquisition policies. The ratings could be upgraded if adjusted total debt to EBITDA moves below 4.5 times, free cash flow to debt moves up to the low double digit range, the EBIT margin improves to the low double digit range, and EBIT to gross interest coverage moves above 2.5 times.
The rating could be downgraded if there is deterioration in the credit metrics, liquidity or the operating and competitive environment. Additional debt financed acquisitions, excessive acquisitions (regardless of financing) and/or a move to a more aggressive financial profile could also prompt a downgrade. Specifically, the rating could be downgraded if the company fails to sustainably improve total adjusted debt to EBITDA to under 5.25 times and EBIT to gross interest coverage to above 1.9 times. The rating could also be downgraded if the EBIT margin declines below the high single digits and/or free cash flow to debt declines below the positive high single digits.
The principal methodology used in these ratings was Packaging Manufacturers: Metal, Glass, and Plastic Containers published in September 2015. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.
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