Fitch Ratings affirms Ball's IDR at BB+ with stable outlook, reflecting company's solid cash flow generation, stable credit metrics, leading market positions, and current expectations in packaging end markets
February 24, 2012
– Fitch Ratings has affirmed the IDR and long-term debt ratings of Ball Corporation. The Rating Outlook is Stable. In addition, Fitch has assigned a 'BB+' rating to Ball Corp.'s $500 million senior unsecured notes offering due 2022. The company intends to use the net proceeds from the offering to pay the consideration, accrued and unpaid interest and related fees in connection with the previously announced tender offer and related consent solicitation for any and all of its outstanding $450 million senior notes due 2018 and for general corporate purposes. Once the 2018 notes are fully redeemed, the rating for that issuance will be withdrawn.
The Ratings affirmation includes:
--IDR at 'BB+';
--Senior Unsecured Debt at 'BB+';
--Senior Secured Credit Facility at 'BBB-'.
The rating affirmation incorporates the company's solid cash flow generation, stable credit metrics, leading market positions in its product categories/market segments, and current expectations in the packaging end markets. During the past couple of years, Ball has reduced overcapacity, removed fixed costs, divested lower margin commodity-oriented assets and rebalanced its mix. Consequently operational focus has sharpened across its strategic footprint resulting in solid operating performance as EBIT improved in 2011.
Ball has very good liquidity resulting from cash generation, availability under its credit agreement and balance sheet cash. Free cash flow (CFO less capital spending less dividend) was $459 million for 2011. At the end of the fourth quarter, Ball had no outstandings on its $1 billion multicurrency revolver that matures in 2015. Ball has significant flexibility under its covenants and basket capacity. Cash was $166 million. Near-term maturities are minimal following the refinancing of its credit facilities in December 2010. As such, the next material maturity is when the term loans mature in 2015.
Ball has additional liquidity through an accounts receivable securitization program. During 2011, Ball entered into a three year receivable securitization agreement that can vary between $150 million and $275 million depending on the seasonality of the company's business. At the end of 2011, $231 million of accounts receivable were sold under this agreement. Ball also has uncommitted, unsecured credit facilities, which Fitch views as a weaker form of liquidity. Ball had up to $465 million of uncommitted lines available of which $149 million was outstanding and due on demand.
Gross leverage proforma for this debt refinancing at the end of 2011 was 2.7 times (x), consistent with 2010. Net leverage was 2.5x, which meets Ball's net leverage target goal. For 2012, Fitch does not expect any further debt reduction and leverage should remain consistent with current levels absent considerations for a large acquisition. As a result, the company has significant flexibility when deploying its excess capital. In 2011, Ball spent approximately $250 million on growth-related capital, $295 million on acquisitions and approximately $474 million on share repurchases. Capital spending will ramp down moderately in 2012 to approximately $400 due to the completion of several expansionary projects. Consequently, Fitch expects FCF levels (after dividends) should be in the range of $370 million to $400 million in 2012. Share repurchases could approach similar levels depending on Ball's acquisition activity.
Risks are reflected in the rating and in Fitch's opinion, are quite manageable. These include the acquisitive nature of the company, the risks inherent within the packaging segment including emerging markets risk and revenue/customer concentration, as well as its underfunded pension plans. In addition, Ball's largest segment, the U.S. beverage can along with the food can segment represent mature business segments subject to volume-related pressure. Ball's exposure in Europe, while material (revenues estimated in the 20 - 25% range), is lower than most other packaging companies.
Longer-term, Ball is well positioned within certain emerging market segments to capture its fair share of growth from can conversions in these lowered penetrated markets. China represents the most important segment and the company has the number one position with approximately 28% market share. The market share concentration in China may however prevent further consolidation by Ball in this highly fragmented market due to governmental antitrust laws. Growth in these regions should more than offset volume related pressure in its mature markets and result in greater cash flows.
The new unsecured notes contain a less restrictive covenant package than the existing unsecured notes. The 2022 notes have a limitation on liens and limitation on sale and leaseback transactions. Ball has significant capacity for additional liens under this covenant. The new notes do not contain any restricted payments limitations. Ball's existing debt contains more restrictive covenants (including restricted payments) with fall away provisions in the event of being rated investment grade.
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