Moody's Upgrades Alliance One Int'l (AOI) to 'Caa1'; Outlook is Stable

September 28, 2016 3:12 PM EDT

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Moody's Investors Service upgraded Alliance One International, Inc.'s (NYSE: AOI) Corporate Family Rating (CFR) to Caa1 from Caa2 and Probability of Default Rating to Caa1-PD from Caa2-PD. Moody's also upgraded the $720 million senior secured second lien notes to Caa2 from Caa3. At the same time, Moody's assigned a Ba3 rating to the company's proposed $40 million ABL revolving credit facility and a B1 rating to $275 million in proposed senior secured first lien notes. In addition, Moody's affirmed the B1 rating on the company's existing $210 million first lien revolving credit facility, as well as the SGL-4 Speculative Grade Rating. The rating on the existing $210 revolving credit facility will be withdrawn at closing when the facility is repaid and retired. The outlook on all ratings is stable.

The Corporate Family Rating upgrade to Caa1 reflects Moody's somewhat diminished concerns about Alliance One's liquidity. A key concern being addressed with the proposed refinancing is the repayment of $200 million outstanding under the company's existing revolving credit facility that expires in April 2017. Proceeds from the proposed bond offering will be used to fully repay the $200 million outstanding under existing revolving credit facility. Approximately $50 million of bond proceeds will be used to reduce borrowings on uncommitted foreign lines of credit. Remaining proceeds will increase cash balances.

The new Ba3 rating on the ABL revolving credit facility is four notches above the Caa1 CFR, reflecting this facility's priority position to a substantial amount of lower priority debt including the proposed $275 million first lien notes and the existing $720 million second lien notes. While the ABL revolver and proposed notes share a first lien on the same collateral, an inter-creditor agreement gives ABL lenders first priority of payment with regards to the most liquid assets (including accounts receivables, inventories, and cash) and second priority of payment with regards to the remaining assets. The notes have a second priority of payment with regards to the most liquid assets and a first priority of payment with regards to the remaining assets. In addition, Moody's believes the provisions of the proposed ABL revolving credit facility provide lenders with enhanced ability to minimize loss. The Ba3 rating is one notch higher than it otherwise would be rated if the facility did not contain such strong provisions.

The new B1 first lien note rating, three notches above the Caa1 Corporate Family Rating, reflects the notes' priority position to a meaningful amount of lower priority debt including the $720 million second lien notes.

The proposed ABL revolver and first lien notes are not guaranteed by the company's foreign subsidiaries. Foreign subsidiaries account for approximately 70% of revenue and 83% of assets. The ABL and notes are structurally subordinated to liabilities at the foreign subsidiaries, including uncommitted lines of credit and trade payables. At June 30, 2016 uncommitted lines totaled $943 million with $458 million drawn.

Ratings Upgraded:

- Corporate Family Rating to Caa1 from Caa2

- Probability of Default Rating to Caa1-PD from Caa2-PD

- $720 million senior secured 2nd lien notes due 2021 to Caa2 (LGD 4) from Caa3 (LGD 5)

Ratings Assigned:

- $40 million senior secured 1st lien ABL revolving credit facility at Ba3 (LGD 1)

- $275 million senior secured 1st lien notes due 2021 at B1 (LGD 2)

Ratings Affirmed:

- $210 million 1st lien revolving credit facility at B1 (LGD 1) (to be withdrawn at closing)

- Speculative Grade Liquidity Rating at SGL-4

The outlook on all ratings is stable.


Alliance One's Caa1 Corporate Family Rating reflects Moody's expectation that credit metrics and liquidity will remain weak over the next 12 to 18 months. Moody's is concerned that Alliance One's maintenance of very high financial leverage will make its capital structure unsustainable long term. Moody's is also concerned about the company's low level of committed lines of credit. The rating also reflects Alliance One's position as one of two major leaf tobacco sourcing, processing, and marketing companies, its established relationships with key tobacco manufacturing customers, and its global procurement and processing network.

The stable outlook reflects Moody's expectation that volumes continue to slowly decline and that the company is able to maintain its operating profit at average historical levels. It also reflects Moody's expectation that Alliance One's weak liquidity profile will not deteriorate.

Ratings could be upgraded if Alliance One improves liquidity and reduces financial leverage. Specific metrics targets include debt to EBITDA sustained below 7.0 times, and EBITA to interest expense sustained above 1.0 time.

Rating could be downgraded if the company's profitability or liquidity deteriorates.

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