We reaffirm our SR2 short-term rating for Verallia’s NEU CP instrument for an amount of up to €400m. Based in Paris, France, Verallia is the world’s No. 3 manufacturer of glass packaging. The group produces a wide range of glass bottles, containers and jars for around 10,000 customers, ranging from local wine producers to global food and beverage brands. Verallia has been listed on Euronext Paris since October 2019, and is currently owned by BWSA (27.96%), BPI France (7.51%), and employees (c. 3.47%), with a free-float of c. 56.63%.
Verallia has a special focus on wine and spirits (around 60% of sales), being the No. 1 glass packager in Europe and No. 2 in Latam. This premium positioning entails higher margins than competitors while reducing substitution risks from other containers like metal and plastic. Over the long term, we expect Verallia to continue to benefit from its positioning, with increasing exports from European wine and spirits producers, as well as from its presence in Latin America, including Brazil, Argentina and Chile. Verallia’s market shares are quite well protected by high barriers for new entrants, as well as by a highly diversified portfolio of clients with which the company has strong and longstanding relationships.
The glass packaging industry is highly capital-intensive. Verallia’s activities necessitate high annual capex (c. 10% of sales or around €250m per year) to maintain the quality of its assets. Furthermore, it needs a significant amount of raw materials, including recycled glass and silica sand, as well as energy, the prices for which tend to be volatile. Energy represented c. 17% of the cost of sales in 2021 or c. €375m (with c. 55% stemming from gas). The group has a comprehensive hedging policy in place which mitigates the impact of energy prices and has some ability to pass on cost inflation to clients. Given the presence of the group in Latam and Russia, which contributed to c. 15.0% to consolidated revenues in 2021, its results may be negatively affected by adverse currency fluctuations.
Verallia delivered a good performance in 2021, with revenues reaching c. €2.7bn (+6.8% at constant currency with volume back to its pre-pandemic level) and EBITDA of €678m (or +8.4% compared with 2020 and +10.2% compared with 2019). EBITDA benefitted from the increase in activity as well as a c. €40m effect resulting from ongoing productivity gain. Total capex amounted to €256m (of which €218m for recurring capex). Verallia’s net reported debt at end-2021 was at a broadly similar level to that of end-2020, resulting in a net reported debt-to-EBITDA ratio of 1.9x at end-2021 (vs 2.0x at end-2020). Verallia’s leverage for 2021 was impacted by €221m (equivalent to 0.3x of EBITDA) of extraordinary share buybacks following the exit of its previous shareholder Horizon Investment Holdings (an affiliate of the private equity firm Apollo, which has gradually exited Verallia since its IPO).
Our SR2 rating is constrained by Verallia’s limited geographical diversification with France, Italy, Spain and Germany together contributing c. 80% of consolidated revenues in FY21 and Latam broadly 11%. Furthermore, the rating is constrained by Verallia’s moderate leverage, with EthiFinance Ratings’ net adjusted debt-to-EBITDA ratio of 2.6x (vs 1.9x as reported by the company) at the end of 2021. This rather elevated leverage stems from Verallia’s former private ownership and should be seen in the context of a capital-intensive industry characterized by high maintenance capex. However, Verallia has a satisfactory track record as highlighted by its gradual improvement in profitability, with EBITDAR margin increasing from 20.4% in FY16 to 25.4% in FY21. The improvement in profitability goes along with a decrease in indebtedness; EthiFinance Ratings’ net adjusted leverage ratio for Verallia has decreased from 5.0x in FY16.
We expect Verallia to continue to generate positive free cash-flow after dividends over 2022-24 (our forecast period) and to maintain an EthiFinance Ratings’ net adjusted leverage ratio below 3.0x after 2021, as well as to comply with its investment grade trajectory with a reported net leverage below 2.0x. Our forecast also includes some further share buybacks stemming from extra cash generation which is not mandatory and can also be used for acquisition and may also depend on the macroeconomic environment. All in, we consider that Verallia has a rather prudent financial policy.
Verallia reported €50m & €90m of sales in Ukraine & Russia respectively in 2021. Since end-February 2022, the group has ceased its production in Ukraine while annual revenues of the Ukrainian site represented in 2021 some 1.9% of consolidated revenues. The exposure to Ukraine is at this stage manageable in our view, as it that to Russia, which is for Verallia mostly a local market.
Verallia had €1.8bn of gross reported debt at end-2021 which included €1.0bn of sustainability linked-notes (with maturity in 2028 & 2031) and €0.5bn of term loan maturing in October 2024. Verallia has €500m of undrawn RCF also maturing in October 2024.
Our adjusted gross debt amounted to c. €2.3bn and mostly included c. €0.4bn of adjustment related to the company’s off-balance sheet factoring program.
The liquidity profile is good. It features large undrawn revolving credit facilities, a long-term debt schedule profile with diversified maturities, and high cash on balance sheet, while we expect that Verallia will continue to generate strong free cash-flow. Given Verallia’s credit profile, we currently consider that the company will be able to refinance its debt in due time.
Credit metrics expected evolution (CMEE): Stable
Our Stable CMEE reflects our expectation that credit metrics will be maintained at a broadly similar level over the next twelve months.
Verallia is towards the lower end of the range of the SR2 category. An upgrade to SR1 is not likely to be derived from improvement in credit metrics, but rather by an improvement in Verallia’s business profile with a combination of greater size, and better geographic and product diversification. In the short-to-medium term, this would be most likely to result from a transformative acquisition, which would probably need a capital increase to offset the deterioration in credit metrics stemming from a debt-funded acquisition.
A downgrade to SR3 could be triggered in the event credit metrics deteriorate, which could stem from lower-than-expected profitability, significant share buybacks or extraordinary dividends, M&A operations, or a mix of these events. Even though at this stage it is not considered by EthiFinance Ratings to be a likely scenario, a shortage of gas supply for end-2022/early 2023, could have, in our view, a significant impact on Verallia’s production and margins.
Report review on NEU CP instrument rating
Rating initiation: SR3 on 17 July 2018.
Last rating action: 1 notch upgrade at SR2 on 13 April 2021.
Rating nature: Solicited short-term instrument rating
With rated entity or related third party participation: Yes. This rating report was published with being reviewed by the issuer.
With access to internal documents: No
With access to management: Yes
Ancillary services provided to the entity: No
Name of the rating committee chair: Marc Pierron, Senior Credit Analyst.
Material sources used to support the rating decision:
Annual and quarterly reports
IPO registration document
Discussions with Verallia management
Limitation of the Rating action:
EthiFinance believes the quality and quantity of information available on the rated entity is sufficient to provide a rating.
EthiFinance has no obligation to audit or verify the accuracy of data provided.
Our methodologies used for this rating are available at:
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