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TEXT - S&P affirms Ardagh Packaging Group Ltd
January 15, 2013 / 3:36 PM / 5 years ago

TEXT - S&P affirms Ardagh Packaging Group Ltd

Overview
     -- Luxembourg-based glass container and metal packaging manufacturer 
Ardagh Packaging Group Ltd. has announced its intention to issue EUR1.1 
billion-equivalent of notes to fund its acquisition of the North American 
operations of Compagnie de Saint-Gobain's (BBB/Negative/A-2) glass business 
Verallia.
     -- We forecast that on a normalized pro forma basis, Ardagh's credit 
metrics will remain within our guidelines for the rating.
     -- We are therefore affirming our long-term corporate credit ratings on 
Ardagh and related entities at 'B'.
     -- The stable outlook reflects our view that Ardagh's credit metrics will 
remain at levels commensurate with a 'B' rating, for example, the ratio of 
adjusted funds from operations to debt is unlikely to exceed 10%.
Rating Action
On Jan. 15, 2013, Standard & Poor's Ratings Services affirmed its 'B' 
long-term corporate credit ratings on Luxembourg-based glass-container and 
metal packaging manufacturer Ardagh Packaging Group Ltd. (Ardagh) and related 
entities Ardagh Packaging Holdings Ltd. and ARD Finance S.A. The outlook is 
stable.

At the same time, we assigned our issue rating of 'B+' to Ardagh's proposed 
$750 million-equivalent (EUR562 million) senior secured notes due 2022 to be 
issued by Ardagh Packaging Finance PLC and Ardagh Holdings USA Inc. The 
recovery rating on these notes is '2', indicating our expectation of 
substantial (70%-90%) recovery in the event of a payment default. 

We assigned our issue rating of 'CCC+' to Ardagh's proposed $700 
million-equivalent (EUR525 million) senior notes due 2020 to be issued by Ardagh
Packaging Finance and Ardagh Holdings USA. The recovery rating on these notes 
is '6', indicating our expectation of negligible (0%-10%) recovery prospects 
in the event of a payment default.

We affirmed our issue ratings on Ardagh's senior secured debt instruments at 
'B+', and our issue ratings on the group's senior debt instruments and 
subordinated payment-in-kind (PIK) notes at 'CCC+'. The recovery ratings on 
these notes are '2' and '6' respectively.

Rationale
The affirmation follows Ardagh's announcement that it has agreed to acquire 
the North American operations of Compagnie de Saint-Gobain's 
(BBB/Negative/A-2) glass business Verallia, Saint-Gobain Container Inc. (not 
rated). Ardagh is planning to finance the acquisition by raising EUR1.1 
billion-equivalent of senior secured and senior notes. 

The affirmation reflects our view that, after the acquisition, on a normalized 
pro forma basis, Ardagh's credit metrics will remain within our guidelines for 
the rating. In our opinion, Ardagh's free operating cash flow generation is 
unlikely to make a significant contribution toward reducing debt over the near 
term because S&P-adjusted funds from operations (FFO) to debt is unlikely to 
exceed 10%. On Sept. 30, 2012, Ardagh's S&P-adjusted debt totaled EUR4.7
billion.

While we understand that Ardagh and Saint-Gobain have signed a sale and 
purchase agreement, the transaction still has to pass certain regulatory 
checks before it can complete.

Our ratings on Ardagh and related entities Ardagh Packaging Holdings Ltd. and 
ARD Finance S.A. reflect Ardagh's "highly leveraged" financial risk profile 
and "satisfactory" business risk profile. We assess management and governance 
as "fair" under our criteria. 

In our view, the main rating constraints include Ardagh's very aggressive 
financial policy and highly leveraged capital structure; its exposure to 
volatile input prices; and the capital-intensive nature of its glass 
operations.

These weaknesses are tempered to some extent by Ardagh's leading position as 
one of the largest glass and metal packaging providers in Europe. Its primary 
focus is on the relatively stable food and beverage end markets. The ratings 
also reflect Ardagh's relatively robust profitability, underpinned by its 
scale, efficient cost base, and ability to manage input cost changes.

In our view, the Verallia North America acquisition will add further support 
to Ardagh's "satisfactory" business risk profile, despite the usual 
integration risks associated with an international acquisition of this size. 
The acquisition will meaningfully improve Ardagh's competitive positioning in 
the U.S., where we understand the combined group will become the market leader 
in glass container manufacturing. Furthermore, we recognize that the 
integration and associated synergies could lead to improved profit margins in 
the future. 

Liquidity
We assess Ardagh's liquidity as "adequate" under our criteria. We forecast 
that liquidity sources should comfortably cover liquidity uses by more than 
1.2x (as defined by our criteria) during 2013.

In 2013, we expect liquidity sources to include EUR1.1 billion of proceeds from 
the notes issuance, surplus cash of just under EUR200 million, and a working 
capital inflow enhanced by management-led initiatives. We estimate that 
liquidity uses will include EUR1.1 billion spending on the Verallia North 
America acquisition and capital expenditure (capex) of about EUR330 million.

As part of the Verallia transaction, Ardagh is negotiating a new $300 million 
asset-based lending facility, which will give the combined group extra 
liquidity for general use. Furthermore, Ardagh already has a secured 
receivables facility agreement, which replaced its previous working capital 
facilities, and is currently undrawn (with EUR80 million of availability). Over 
time, this facility will increase in size (up to EUR150 million) as additional 
sellers are added.

In our view, the group has a degree of flexibility in curbing capex, which in 
turn could become a potential source of additional liquidity. Furthermore, 
Ardagh has announced that it intends to use an IPO as a source of liquidity, 
which could be used to reduce debt in the near term. However, market 
conditions remain highly uncertain. 

We consider that, in the near term, further acquisition spending will be 
limited, given the group's need to focus on the successful integration of 
Verallia North America (and the potential IPO). However, significant spending 
on further external growth is extremely likely in the medium term, as it is 
part of the group's strategy.

Ardagh's liquidity position is supported by a comfortable debt maturity 
profile, which is dominated by medium- to long-term sources of funding. The 
earliest significant debt maturity is in 2016.

We think it likely that Ardagh will remain in full compliance with its very 
limited financial covenants, including those on its Australasian senior 
banking facilities. We understand that there are limited financial covenants 
on the HSBC secured receivables facility, and that there will only be one 
fixed-charge maintenance financial covenant on the new asset-based lending 
facility, which is only subject to testing if the facility is over 85% drawn.

Recovery analysis
We rate the various senior secured notes issued by Ardagh Packaging Finance 
PLC, Ardagh Glass Finance PLC, and Ardagh Holdings USA Inc. at 'B+', one notch 
above the corporate credit rating on Ardagh. The recovery rating on these debt 
instruments is '2', indicating our expectation of substantial (70%-90%) 
recovery for senior secured noteholders in the event of a payment default.

We rate the various senior unsecured notes and subordinated notes issued by 
Ardagh Packaging Finance, Ardagh Glass Finance, Ardagh MP Holdings USA, and 
ARD Finance at 'CCC+', two notches below the corporate credit rating on 
Ardagh. The recovery rating on these debt instruments is '6', indicating our 
expectation of negligible (0%-10%) recovery prospects in the event of a 
payment default.

The recovery ratings on the new and existing secured notes are underpinned, in 
our opinion, by the group's fair valuation (including the proposed acquisition 
of Verallia North America) and these notes' first-ranking security over 
certain assets of the group (see description below). This security is to be 
shared on an pro rata basis between the new and existing secured notes, as 
will be established in the revised intercreditor agreement. The recovery 
rating on these notes will be constrained at the '2' level by the material 
amount of prior-ranking debt, the significant permitted liens and collateral 
liens baskets under the notes documentation, and the sheer volume of 
first-lien debt, which dilutes overall recovery prospects. The recovery rating 
of '6' on the new senior unsecured notes reflects these notes' contractual 
subordination to a significant amount of first-lien debt, including the senior 
secured notes and several prior-ranking borrowing base facilities and 
prior-ranking liabilities.

Following the transaction, we understand that Ardagh will enter into a new 
$300 million asset-based lending facility. Together with the existing EUR150 
million HSBC securitization program (EUR80 million currently available), the
GBP35 
million GE Commercial Finance facility, EUR2,632 million-equivalent senior 
secured notes, and EUR2,206 million-equivalent senior unsecured notes, including
the new notes, this will account for nearly all of Ardagh's debt. We expect 
the group to redeem nearly all of the remaining credit facilities in early 
2013.

The proposed $750 million (EUR562 million-equivalent) senior secured notes and 
the existing senior secured notes benefit from the same security over Ardagh's 
preacquisition assets. These consist of floating charges on receivables and 
inventories in England, the U.S. and (with the exclusion of receivables) 
Ireland; fixed land charges over certain real estate assets in England; and 
pledges over certain receivables and inventory in Germany, Guernsey, Poland, 
The Netherlands, and Scotland; and share pledges. They also benefit from 
security over nearly all of the owned assets of the acquired business (except 
receivables and inventories) and the shares of the acquired business, Verallia 
North America. The proposed and existing secured notes will share the same 
senior secured guarantees from existing and new subsidiary guarantors, 
accounting together for about 82.8% of the combined group's total assets, 89% 
of its revenues, and 91.7% of its EBITDA. 

The new senior unsecured notes will benefit from a senior guarantee from the 
parent guarantor (Ardagh Packaging Holdings Ltd.) and a senior subordinated 
guarantee from existing and new subsidiary guarantors. Coverage test levels 
are the same as for the senior secured notes. An amendment to the existing 
intercreditor agreement will clearly establish that the new and existing 
senior unsecured notes will rank pari passu among themselves.

The financial and nonfinancial covenants that are part of the documentation of 
the new senior secured notes include significant debt baskets under the 
permitted liens and collateral liens covenants, which are not fully used 
presently (and we have assumed would be undrawn at the point of default); 
significant permitted investment baskets to allow for the group's external 
growth strategy; and fairly standard limits on dividend payments, asset sales, 
and transactions with affiliates.

Ardagh's senior management moved from Dublin to Paris in early 2012, although 
the accounting, tax, and information technology functions remain in Dublin. We 
anticipate that in a reorganization, Ardagh's center of main interest (COMI) 
is likely to be determined as Luxembourg, where the group is registered and 
where its board of directors meets. Through this acquisition, the group will 
also increase its exposure to the U.S., a country which we consider benefits 
from a fairly creditor-friendly insolvency regime. That said, if there was 
increasing evidence that the regular administration of the group's business 
was being conducted in France, France would be more likely to become the COMI. 
(For further information, see "COMIs In EU Insolvency Proceedings And Their 
Bearing On Standard & Poor's Recovery Ratings," published on July 8, 2008.) In 
accordance with our criteria, maintaining the '2' recovery rating requires 
higher recovery prospects with France as COMI than with Luxembourg as COMI. 

Standard & Poor's hypothetical default scenario for Ardagh assumes a 
combination of the following factors: 
     -- Higher-than-expected integration costs for the acquired businesses and 
weaker overall operating performance; 
     -- Declining demand, caused by increased product substitution, leading to 
lower capacity utilization rates; 
     -- Squeezed margins as a result of increasing costs, particularly in 
relation to energy prices (especially volatile natural gas prices), paired 
with an inability to pass on these cost increases to customers; and 
     -- Lower revenues caused by intensified competition, pressure on prices, 
and decreasing demand. 

In our simulated default scenario, we project a hypothetical default in 2016 
and EBITDA falling to about EUR545 million at that point.

Our recovery analysis assumes a stressed enterprise value of approximately 
EUR3.0 billion at the point where the company would default, based on a 5.5x 
multiple (a default multiple in line with peers) of the projected EBITDA. 
After reducing the stressed enterprise value by the present value of 
administrative expenses, 50% of the remaining pension deficit (after paying 
part of it in the proposed transaction), the GE financing facility, the HSBC 
securitization facility, and the new asset-based lending facility, we 
calculate a residual enterprise value of EUR2,140 million. This allows for 
substantial recovery expectations in the 70%-90% range for the first-lien 
debt. Therefore, the senior secured notes have been assigned a recovery rating 
of '2'. Under this scenario, all of the senior unsecured notes and the PIK 
notes would not see any recovery, hence the '6' recovery rating attributed to 
these notes.

Given the amount of first-lien debt and priority liabilities, we do not 
currently expect further upside to the '2' recovery ratings attributed to 
Ardagh's senior secured notes. If Ardagh was to make substantial use of the 
ample permitted liens and permitted collateral liens debt baskets under the 
notes documentation without a proportional increase in the company's 
valuation, we could lower our view of these notes' recovery prospects.
Outlook
The stable outlook reflects our view that Ardagh's credit metrics will remain 
at levels commensurate with the 'B' rating. Specifically, this means adjusted 
FFO to debt is unlikely to exceed 10%. The outlook also takes into account the 
group's aggressive financial policy and ongoing, largely debt-funded growth 
strategy.

We could take a positive rating action if the group deleverages and improves 
its credit measures in line with those we consider commensurate with a 'B+' 
rating. This could occur if Ardagh uses an IPO to reduce its debt.

Equally, we could take a negative rating action if Ardagh's credit measures 
deteriorate further--for example, because of further debt-funded acquisitions, 
financial underperformance, or unexpected material shareholder returns. 
Similarly, we could downgrade Ardagh if the group suffers from liquidity 
issues. However, we consider these risks to be remote in the near term.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit 
Portal.

     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- General Criteria: Understanding Standard & Poor's Rating Definitions, 
June 3, 2009
     -- Key Credit Factors: Methodology And Assumptions On Risks In The 
Packaging Industry, Dec. 4, 2008 
     --  2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008


Ratings List
Ardagh Packaging Group Ltd.
Ardagh Packaging Holdings Ltd.
ARD Finance S.A.
 Corporate Credit Rating                B/Stable/--        

Ardagh Packaging Finance PLC
 Senior Secured                         B+                 
  Recovery Rating                       2
 Senior Unsecured                       CCC+               
  Recovery Rating                       6                  

ARD Finance S.A.
 Subordinated                           CCC+               
  Recovery Rating                       6        

Ardagh Glass Finance PLC
 Senior Secured                         B+                 
  Recovery Rating                       2             
 Senior Unsecured                       CCC+               
   Recovery Rating                      6                  

New Rating
Ardagh Packaging Finance PLC
 Senior Secured                         B+                 
   Recovery Rating                      2                  
 Senior Unsecured                       CCC+               
   Recovery Rating                      6

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