UNIVAR SOLUTIONS INC.
Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of
Fitch has also affirmed the Long-Term issue ratings of Blue Tree's ABL at 'BB+'/'RR1' and TL-B at 'BB+'/'RR2'. The Rating Outlooks remain Stable.
The 'BB-' rating reflects the company's leading position in polymer distribution, its flexible and scalable operating model, solid FCF generation, strong relationship with suppliers, and commodity exposure.
The Stable Outlooks reflect Fitch's expectations of continued volumetric stability and stable cash generation throughout the forecast horizon. To the extent that the company applies its consistently positive cash flow toward reducing its ABL balance, bolt-on M&A, and growth capex related to strengthening its value-add offerings, Fitch believes that Blue Tree's operating profile will remain strong and its credit risk manageable throughout the ratings horizon.
Key Rating Drivers
Normalizing Earnings, Strong FCF: Blue Tree's operating performance is projected to normalize over the near-term as petrochemical market conditions tighten, after realizing outsized EBITDA margins and FCF generation due to dramatic increases in distributed polyethylene and polypropylene product pricing from 2H20 through 1H22. Fitch's forecast points to polymer pricing declining towards normal levels through 2H22 and 2023 as new capacity leans the market towards balance and demand continues to decline from recent highs, leading to earnings performance more consistent with historical results for Blue Tree and its operating subsidiaries.
Despite the prospects for weakening revenues and EBITDA generation, Blue Tree is expected to correspondingly benefit from sizable working capital releases through 2023. Fitch projects around
Growth-Focused Capital Allocation: Fitch expects Blue Tree to prudently balance capital allocation priorities between gross debt reduction, accelerating M&A activity, and various capital projects over the ratings horizon. Notably, with around
Supported by substantial FCF generation projected through the forecast horizon, Fitch recognizes that Blue Tree retains meaningful financial flexibility for accelerating acquisition spending and margin-accretive growth capex projects. Fitch assumes that any leveraging transaction will be followed up with a prioritization toward gross debt reduction back within management's targeted range.
Fragmented Market Provides Opportunity: Benefiting from size, scale and diversification within polymers, Blue Tree is better able to navigate logistical challenges and counterparty risk than smaller competitors. The global chemical distribution market is highly fragmented, with an estimated market size of roughly
Sustainable Market Leadership: Blue Tree's strong relationship with suppliers allowed them to capture a relatively larger proportion of supply than many of its competitors, and as a result the company was able to grow share throughout 2020, 2021, and 1H22. During the global financial crisis, the company generated strong FCF despite adverse macroeconomic cycles and volatile raw material prices due in large part to its countercyclical working capital profile.
Solid, Stable FCF: Blue Tree's strong relationships with customers and countercyclical working capital have resulted in strong, stable cash generation through the cycle. The company's manufacturing capabilities add value on both the supplier and consumer side, which alongside the company's disciplined approach to capital deployment are supportive of the company's credit profile. Fitch believes that Blue Tree will allocate cash flow toward a combination of capital projects and bolt-on acquisitions which expand the company's value-add services, and debt reduction (most likely through ABL paydown) such that they can comfortably operate with total debt with equity credit/operating EBITDA of around 3.5x.
Parent-Subsidiary Linkage Considerations: Under our parent-subsidiary linkage criteria, Fitch has equalized the IDRs of
Derivation Summary
Blue Tree is the largest North American polymer distributor in a fragmented industry. Relative to
Each of these distributors benefits from significant size, scale and diversification compared with peers within their markets. Fitch believes the fragmented nature of, and potential for, continued outsourcing within chemicals distribution provides distributors like Blue Tree and
Fitch views cash flow risk within the distribution industry as relatively low compared with chemicals producers, given the limited commodity price risk, diversification of customers and end-markets, low annual capex requirements of 1%-2% annually, and working capital benefits in the current down cycle. While technology and metals distribution market risks differ, the overall operating performances and cash flow resiliency are similar, with FCF margins for these distribution peers averaging in the low-to-mid-single digits over the past five years.
Fitch expects a more normalized price environment coupled with management directing cash flows toward modest gross debt reduction and bolt-on M&A to lead to gross leverage of around 3.5x. Fitch views this leverage profile to be consistent with 'BB-' rating tolerances.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
Gradually lower polymer pricing as market supply issues alleviate, while volume growth is modest due to normalized demand levels;
Margins normalize towards historical levels;
Solid FCF generation throughout forecast, supported early in the forecast by countercyclical working capital;
FCF allocated primarily toward bolt-on M&A and gross debt reduction.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Gross debt reduction and steady EBITDA growth, leading to EBITDA Leverage durably below 3.25x;
Continued investment in additional product lines and ancillary services, further strengthening relationships with suppliers and customers;
Demonstrated ability to generate solid FCF during periods of depressed earnings;
Demonstrated track record of adherence to capital allocation priorities and financial policy targets.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Harsher than expected competition and/or poor cost control efforts, leading to EBITDA Leverage durably above 3.75x;
Deterioration in the company's relationships with suppliers, leading to eroding market share;
Continually strained operating environment, leading to a strained earnings profile and reductions in the borrowing base, resulting in pressured liquidity;
More aggressive than expected financial policy, representing a departure from historical norms.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Upsized Liquidity: Blue Tree recently exercised the accordion under its ABL Credit Agreement, increasing total commitments from
Blue Tree faces limited maturities until the ABL matures in 2027, followed by the term loan in 2028. While the
Although Blue Tree's existing
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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