Consumer Durables News

Research: Rating Action: Moody’s downgrades Nobel Bidco B.V. to B2; outlook negative


Madrid, November 24, 2022 — Moody’s Investors Service (“Moody’s”) has today downgraded Nobel Bidco B.V.’s (“Nobel” or “the company”) corporate family rating (CFR) to B2 from B1 and its probability of default rating (PDR) to B2-PD from B1-PD. Nobel Bidco B.V. is the parent company of Philips’ domestic appliances business.

Concurrently, Moody’s has downgraded to B2 from B1 the ratings on the €1,050 million senior secured term loan B due 2028, the €650 million senior secured notes due 2028, and the €250 million senior secured revolving credit facility (RCF) due 2027, borrowed by Nobel Bidco B.V. The outlook remains negative.

“The downgrade reflects our view that persistent inflationary pressures and reduced consumer disposable income, combined with the negative impact from foreign currency volatility and higher than expected carve-out costs will result in a higher than expected deterioration in Nobel’s credit metrics over the next 12 to 18 months,” says Pilar Anduiza, a Moody’s Analyst and lead analyst for Nobel.

“The negative outlook reflects the expectation that leverage will remain very high in 2023 while visibility into the company’s ability to improve operating performance and reduce leverage below 6.5x by 2024 is limited given the challenging macroeconomic environment,” added Ms Anduiza.

A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The downgrade to B2 reflects Moody’s view that the company’s earnings will remain weak in 2023 while profitability improvement will be delayed as a result of persistent inflationary pressures, reduced consumer disposable income, the negative impact from foreign currency volatility as well as higher than expected restructuring and carve-out related costs, resulting in a deterioration in the company’s credit metrics for the next 12 to 18 months.

YTD September 2022 the company reported comparable top line growth of 8.4%. However, the company’s EBITDA margin before brand license costs declined by 5.5 p.p. as price increases  and volume growth were not enough to offset increasing raw material, freight and other operating costs as well as the negative impact from foreign currency volatility. Nobel’s EBITDA generation after brand license and carve-out related costs was almost zero in the first three quarters of the year.

While Nobel’s volumes and market share increased in the third quarter of 2022, the uncertain economic prospects and deteriorating consumer confidence also pose challenges to the company’s top line over the next 12-18 months. Nobel was able to raise prices during 2022, but Moody’s notes that it could become harder to raise prices going forward if consumer disposable income is strained by inflationary pressures and retailers push back on suppliers to reduce prices. Higher inventory levels may also lead to discounting in order to sell products quicker and to retain market share in a competitive environment.

Moody’s also assumes higher carve-out costs of around €120 million in 2022 and around €70-80 million in 2023, which will limit deleveraging and impair free cash flow generation.

Moody’s expects Nobel’s leverage to remain around 9x in 2023 (around 6.5x excluding carve-out costs) and to reduce below 6.0x by 2024. Moody’s also expects higher interest costs to weaken the company’s EBIT to interest cover metrics to around 1.5x-3.0x. Lower profits, higher carve-out and higher interest rates will also result in negative free cash flow generation of around €100 million in 2022 and around €20 million in 2023, only turning positive in 2024, although visibility remains low.

More positively, Moody’s notes that the company reported good progress in the process of establishing a stand-alone IT infrastructure which is expected to be completed in 2023 and expects to achieve cost savings of over €40 million in the next 12 to 18 months.

The rating assumes that the company will complete the exit from the TSA with Philips in 2023 and that carve-out costs in 2024 will remain minimal resulting in an improvement in its credit metrics so that its leverage reduces to between 6.0x and 5.0x and its free cash flow generation turns positive.

The rating continues to be supported by the strong business profile of the company reflecting its (1) leading market positions globally, underpinned by the strong recognition of the Philips’ brand and track record of product innovation; (2) large scale, broad product portfolio and geographic sales diversity; (3) adequate liquidity; and (4) free cash flow generation capacity, supported by an asset-light business model.

However, the rating is constrained by (1) the company’s very high leverage, with a Moody’s adjusted gross debt to EBITDA ratio around 9x in 2023 including carve-out costs, which will only decline below 6.0x by 2024; (2) the exposure to discretionary consumer spending and to emerging markets, both of which bring potential earnings volatility; (3) the execution risk associated with the carve-out from Royal Philips N.V. and the repositioning of the business in China, and (4) the increasing competition and continued need to focus on product innovation to protect profit margins and market share.

LIQUIDITY

Moody’s views Nobel’s liquidity as adequate. The company had €95 million of cash on balance sheet as of September 2022 as well as full availability under the €250 million RCF. Moody’s expects the company to generate negative free cash flow over the next 12-18 months. However, the company does not have any material debt maturities until 2027. The RCF is subject to a senior net leverage covenant of 10.0x, to be tested if 40% or more of the facility is drawn, and under which Moody’s expects the company will maintain ample capacity.

STRUCTURAL CONSIDERATIONS

The B2 rating on the €1,050 million senior secured term loan B and €250 million RCF is in line with the company’s CFR. This reflects the pari passu ranking of the facilities, as well as the assumption of a 50% standard family recovery rate, in line with Moody’s customary approach for covenant-lite capital structures.

The facilities benefit from upstream guarantees from the group’s restricted subsidiaries representing at least 80% of consolidated EBITDA, and are secured by intra-group receivables, bank accounts and share pledges.

RATIONALE FOR NEGATIVE OUTLOOK

The negative outlook reflects Moody’s expectation that leverage will remain very high in 2023 as well as uncertainties around the company’s ability to improve its operating performance and reduce its financial leverage in 2024.

Failure to demonstrate operating margin improvements, reduce carve-out costs, and ability to generate positive free cash flow in 2024 with financial leverage on a Moody’s adjusted gross debt to EBITDA basis reducing below 6.0x in 2024, could lead to further downward pressure on the rating.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on the rating could develop if the company successfully executes the carve out and its operating performance improves while developing a track record of operating under conservative financial policies such that (1) Moody’s adjusted leverage reduces below 5.0x on a sustainable basis; (2) its Moody’s adjusted EBIT margin improves towards the low double-digit in percentage terms; and (3) it generates material and sustainable positive free cash flow generation.

Conversely, negative pressure on the rating could materialise if operating performance does not improve going forward such that (1) Moody’s adjusted leverage remains above 6.5x by 2024; (2) the separation process from Royal Philips N.V. results into higher-than-anticipated extraordinary costs leading to sustained negative free cash flow generation beyond 2023; (3) the company’s liquidity deteriorates; or (4) the company pursues an aggressive financial policy including large acquisitions and shareholder distributions.

LIST OF AFFECTED RATINGS

Downgrades:

..Issuer: Nobel Bidco B.V.

…. Probability of Default Rating, Downgraded to B2-PD from B1-PD

…. LT Corporate Family Rating, Downgraded to B2 from B1

….Senior Secured Bank Credit Facility, Downgraded to B2 from B1

….Senior Secured Regular Bond/Debenture, Downgraded to B2 from B1

Outlook Actions:

..Issuer: Nobel Bidco B.V.

….Outlook, Remains Negative

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Consumer Durables published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74987. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.

COMPANY PROFILE

Nobel Bidco B.V. is a leading global company in the small domestic appliances segment, with sales in 130 countries. Nobel’s product portfolio spans across five categories, including Kitchen Appliances, Coffee, Garment Care, Floor Care and Air Care. Most of Nobel’s products are sold under the global Philips brand. Nobel is fully owned by private equity firm Hillhouse Capital. In 2020, Nobel generated €2.5 billion of revenue and €335 million of pro forma company-adjusted EBITDA.

REGULATORY DISCLOSURES

For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Maria del Pilar Anduiza de la Hera
Analyst
Corporate Finance Group
Moody’s Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid, 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody’s Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid, 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454



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