Hong Kong, August 17, 2022 — Moody’s Buyers Service has assigned a first-time B2 company household score (CFR) to Deer Funding Holdings Restricted.
The score outlook is secure.
The score depends on the passable documentation and profitable completion of the acquisition financing for Carlyle’s acquisition of HCP World Restricted. A failure to fulfill such circumstances may strain the score.
Moody’s assessed Deer’s monetary efficiency when contemplating HCP’s monetary profile as a result of HCP will likely be Deer’s solely working subsidiary upon the completion of the acquisition.
RATINGS RATIONALE
“The B2 CFR displays HCP’s lengthy working observe report, sturdy market place, superb liquidity and good profitability,” says Shawn Xiong, a Moody’s Vice President and Senior Analyst.
“However, the score is constrained by HCP’s small income scale and publicity to cyclical finish markets, excessive monetary leverage and possession by a non-public fairness agency,” provides Xiong.
Based in 1960, HCP has over 60 years of working historical past within the beauty and skincare product packaging manufacturing trade. The corporate is a market chief within the inflexible plastic packaging sector.
However, the corporate’s absolute income scale is small and it operates in a extremely aggressive and fragmented market. Its merchandise concentrate on and are restricted to premium packaging for beauty and skincare merchandise, that are discretionary purchases by shoppers.
The corporate has on common over 20 years of enterprise relationship with beauty market leaders, together with Estee Lauder Corporations Inc. (The) (A1 secure) and L’Oreal S.A. (Aa1 secure). For 2021, HCP generated round 40% of its whole revenues from these two firms. These longstanding enterprise relationships present a level of income visibility over the subsequent two years.
Moody’s expects HCP will profit from the sturdy restoration within the beauty and skincare trade, underpinned by shoppers’ return to workplaces with normalized routines. Moody’s additionally expects this restoration to learn giant incumbents within the beauty and skincare sector, and for shoppers to proceed to commerce up for premium merchandise.
However the above, Moody’s expects HCP’s income restoration to sluggish to five%-6% progress in 2022 as a result of pandemic-related disruptions in China (A1 secure), notably throughout the first 4 months of the yr. The corporate’s income progress ought to be a lot stronger at 15%-20% for 2023, pushed by natural income progress and synergistic advantages with Tokiwa, a Carlyle-owned beauty and skincare unique tools producer primarily based in Japan.
HCP has exhibited sturdy adjusted EBITDA margins within the vary of 24%-25%, traditionally supported by its concentrate on premium merchandise and vital manufacturing capacities in China, the place prices are comparatively decrease. On account of pandemic-related disruptions and product combine modifications, the corporate’s adjusted EBITDA margin declined considerably to round 16.5% for 2021. Moody’s expects HCP’s gross sales to higher-margined North American and European markets to extend proportionally and pandemic-related disruptions to regularly subside over the subsequent 12-18 months, which ought to assist the corporate’s margin restoration.
Moreover, although most of its buyer contracts are fastened value, HCP has demonstrated a capability to barter with its giant clients to go by a few of its vital price will increase. This could mood the unfavorable influence of rising uncooked materials, labor and freight prices. Consequently, Moody’s expects HCP’s adjusted EBITDA margin to recuperate to 18.5%-21.0% over the subsequent 12-18 months.
In consequence, Moody’s expects HCP’s monetary leverage, as measured by adjusted debt/EBITDA, to enhance towards 7.5x-8.0x in 2022 and 5.5x-6.0x in 2023, from 11.7x in 2021. The beginning leverage degree is weak for the B2 CFR, though that is mitigated by HCP’s superb liquidity and anticipated constructive free money circulate over the subsequent 12-18 months.
Deer’s scores additionally take into account the corporate’s non-public firm standing, which lead to low company transparency. As well as, Moody’s has thought of occasion dangers associated to materials merger and acquisitions and financing actions, given its full possession by a non-public fairness agency.
HCP’s liquidity will likely be superb upon completion of the acquisition financing. Its liquidity is supported by an anticipated $35 million opening money stability, a $75 million undrawn revolving credit score facility, and an anticipated largely constructive free money circulate era over the subsequent 12-18 months. In the meantime, the corporate won’t have any materials debt maturity till 2029.
ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) CONSIDERATIONS
As a producer of packaging merchandise product of plastic and steel for the beauty and skincare trade, HCP is uncovered to environmental and social dangers stemming from an rising concentrate on sustainable packaging amongst shoppers, clients and regulators. These tendencies may lead to not solely decrease volumes but in addition incremental prices, which is able to weigh on the corporate’s profitability and money circulate. In accordance with the corporate, round 35% of its merchandise are made utilizing recycled supplies.
With regard to governance dangers, HCP is managed by non-public fairness agency, the Carlyle, which like different monetary sponsors has tolerance for comparatively excessive leverage within the firms it controls.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The secure outlook displays Moody’s expectation that HCP’s working efficiency will recuperate, supported by sturdy demand progress; and that its monetary leverage will enhance to a degree per the B2 score over the subsequent two years, whereas sustaining good liquidity. The outlook additionally assumes that the corporate won’t embark on any materials debt funded acquisitions or shareholder distributions.
Upward strain on the scores may develop if HCP’s adjusted debt/EBITDA improves to 4.5x on a sustained foundation, and if it maintains constructive free money circulate era and an excellent liquidity profile.
Conversely, unfavorable strain on the score may develop if the corporate’s working efficiency materially deteriorates or it embarks on giant debt-funded acquisitions or shareholder distributions, such that its Moody’s-adjusted leverage fails to enhance towards 6.0x and its free money circulate stays unfavorable for a protracted interval. Downward strain on the score may additionally come up if the corporate’s liquidity deteriorates.
The principal methodology utilized in these scores was Packaging Producers: Steel, Glass and Plastic Containers revealed in December 2021 and out there at https://scores.moodys.com/api/rmc-documents/360650. Alternatively, please see the Ranking Methodologies web page on https://scores.moodys.com for a duplicate of this technique.
Based in 1960, HCP at the moment has 10 manufacturing crops and 11 gross sales workplace throughout China, Europe and America. Upon completion of the acquisition, Carlyle will personal a 100% stake in HCP by its varied intermediate holding firms, together with Deer.
REGULATORY DISCLOSURES
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The primary title beneath is the lead score analyst for this Credit score Ranking and the final title beneath is the particular person primarily answerable for approving this Credit score Ranking.
Shawn Xiong
Vice President – Senior Analyst
Company Finance Group
Moody’s Buyers Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Shopper Service: 852 3551 3077
Clement Cheuk Yiu Wong
Affiliate Managing Director
Company Finance Group
JOURNALISTS: 852 3758 1350
Shopper Service: 852 3551 3077
Releasing Workplace:
Moody’s Buyers Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Shopper Service: 852 3551 3077
