S&P Upgrades Multi Packaging Solutions (MPSX) to 'B+'; Outlook Stable

September 19, 2016 2:05 PM EDT

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S&P Global Ratings raised its corporate credit rating on Multi Packaging Solutions Ltd. (NYSE: MPSX) by one notch to 'B+'. The outlook is stable.

We also raised the ratings on the debt held at the company's subsidiaries (Multi Packaging Solutions Inc., Chase Bidco Ltd., and MPS Mustang Corp.) to 'BB-' from 'B+'. The recovery rating remains '2'. We note that the '2' recovery rating on the secured debt, indicating our expectation of substantial (70%-90%) recovery in the event of a payment default, has moved to the lower end of the range from the higher end of the range because of the increased proportion of secured debt relative to unsecured debt pro forma for the transaction and subsequent notes refinancing.

We also assigned our '2' recovery rating and 'BB-' issue rating to the company's proposed $220 million secured term loan. The borrowers are Multi Packaging Solutions Inc. and Multi Packaging Solutions Ltd. The '2' recovery rating on the secured term loan indicates our expectation of substantial (70%-90%; lower end of the range) recovery in the event of a payment default. We expect the terms and conditions of the new loan to be substantially similar to those of the existing secured debt.

We intend to withdraw our ratings on the senior unsecured notes once they have been repaid with the proposed term loan's proceeds.

The upgrade on MPS reflects the company's debt reduction and improved credit measures since its IPO in October 2015, and the likelihood of the company's credit statistics remaining appropriate for the modestly higher rating despite the potential for tempered organic growth. With the refinancing of its 8.5% notes and the proposed repricing of its euro- and sterling-denominated term debt, MPS could save roughly $10 million in interest expense annually and strengthen its EBITDA-to-interest coverage ratio to roughly 4.5x next year, from 3.7x at its fiscal year end of June 30, 2016. The upgrade is also based on management abiding by less aggressive financial policies than typically associated with other financial sponsor-owned firms. This would be indicated by adjusted debt to EBITDA remaining within the 4.0x-5.0x range and funds from operations (FFO) to adjusted debt staying within 12%-20%. MPS' respective figures were 3.8x and 18% at June 30, 2016, affording the company some flexibility for debt-funded acquisitions.

"While financial sponsor ownership would normally limit the improvement of an issuer's financial risk profile, we perceive the risk of a permanent, material increase in debt leverage as low," said S&P Global Ratings credit analyst James Siahaan. "We believe MPS' FFO to adjusted debt ratio will continue to stay near 20% based on our understanding of the company's leverage targets and the likelihood that the financial sponsors' ownership stake in MPS will continue to reduce. As such, we have revised the company's financial policy score to FS-5 from FS-6, resulting in an improvement in the company's overall financial risk profile to aggressive from highly leveraged."

The stable outlook on MPS reflects our expectation that despite slow global economic growth, the company's continued focus on cost-reduction and plant-optimization will promote stability in its EBITDA and cash flow, allowing credit measures to remain at the levels appropriate for the FS-5 financial policy assessment. The rating is dependent on management continuing to abide by financial policies supportive of this designation and maintaining an adjusted debt-to-EBITDA ratio within 4x-5x and an FFO-to-adjusted debt ratio of 12%-20%. We note that despite the Oct. 27, 2015, IPO, roughly 56% of MPS' shares remain under the control of the company's equity sponsors Madison Dearborn Partners LLC and The Carlyle Group. Nonetheless, we assume MPS' management and private-equity owners will be supportive of the company's credit quality, and thus we have not factored any shareholder distributions or meaningful debt-funded acquisitions into our analysis. We see MPS' diversity and competitive position as favorable compared with its peers', and believe that the company's post-IPO credit measures provide it with some flexibility at the current rating level.

We could lower the ratings if operating performance weakens significantly--for example, with revenues contracting by more than 5% and adjusted EBITDA margins depressed by more than 400 basis points--or the company pursues a large, debt-funded acquisition or dividend recapitalization. These scenarios could result in adjusted debt to EBITDA weakening to above 7x. If MPS' debt leverage stays above that level and/or its liquidity is meaningfully diminished without the prospect for a quick recovery then we could consider lower ratings.

We could raise the ratings if MPS continues to enhance its profitability via plant optimization and cost reduction while maintaining appropriate credit measures. We could also raise the ratings if MPS' financial sponsors continue to exit their position through a series of secondary offerings, taking their collective ownership stake down to less than 40%. These scenarios could cause us to revise our comparable rating analysis modifier to neutral, which would yield a one-notch upgrade.

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