Failed management and huge debts: Keter Plastic’s credit rating drops
Failed management and huge debts: Keter Plastic’s credit rating drops
Moody's downgraded Keter's credit rating to Caa1, after a move to recycle the company's debts led by CEO Alejandro Pena failed. The rating company notes that the high leverage and high interest rates will make it difficult to recycle the debt amounting to 1.2 billion euros
The deterioration of Keter Plastic under CEO Alejandro Pena continues: after the failure to take the company public in the U.S., rating agency Moody's lowered the company's credit rating by one level from B3 to Caa1. The rating agency's economists determined that the recession and inflation damaged the company's stability. The downgrade is also accompanied by a change in the outlook from stable to negative, this is due to the weight of the loans taken out by the controlling owner BC Partners for the purchase of the company from the Sagol family. In 2016, the fund purchased 80% of the shares for $1.4 billion according to a company value of $1.7 billion.
The CEO of the Keter Group, Alejandro Pena, planned to issue the company last September but failed in the task after receiving negative indications from the market regarding its valuation. Pena aimed to issue Keter at a value of $2.5 billion before money and raise $500 million. After that he tried to start the process of recycling the debt, but this move also failed for the time being and led to the lowering of the company's rating.
As previously reported in Calcalist, starting from last month, one year before the leveraged loans expire in October 2023, the fund must present solutions to finance the repayment of the debt in the amount of 1.2 billion euros, and the failure of this move could lead to a downgrade. Moody's negatively notes Keter's leverage level of eight times (ratio between debt and EBITDA) and estimates that in 2024 this level may decrease to seven times. Keter faces the option of recycling the debt through lenders or private credit funds, but the economic crisis is a challenge, according to Moody's economists.
According to Moody's, the CEO continues to try to lead a debt recycling move, this after withdrawing from a similar move to recycle 1.3 billion euros last January because the interest rates seemed too high to him. This decision led the company to embark on the same move at a later date, but in an even more difficult economic environment. According to sources close to the BC Partners fund, this chain of wrong decisions is creating tension between the fund and the CEO’s office.
Pena was appointed to the position in February 2018. The decision to appoint a foreign CEO was made in order to bring the company to a successful IPO on Nasdaq. Keter was supposed to raise hundreds of millions of dollars in the IPO for the purpose of paying off the debt taken by the fund for its purchase. The issuance would have improved the capital structure of the company and facilitated the recycling of the remaining debt, under better financing conditions than those offered to Keter today.
Moody's economists state that the company's high leverage, together with macroeconomic conditions and rising interest rates, will make it difficult to recycle the debt. According to them, the delay in recycling hurt the company's liquidity. According to Moody's, there was a 13% increase in the company's sales in the first eight months of the year, due to an increase in demand. However, the company's EBITDA fell by 15% during this period as a result of inflation. They point out that Keter has taken a series of steps to improve profitability and expect an improvement in profitability at the end of the second half of 2022, but the effects of the recession and inflation will eat away at the company's projected profitability.
The rating agency expects some recovery during 2023, among other things due to a drop in raw material costs and Keter's strength as a leading manufacturer with sales in Europe, North America and Israel. Moody's positively notes Keter's strength in the wide range of products and its relationships with major distributors. In 2021, Keter recorded revenues of 1.6 billion euros and EBITDA (flow operating profit) of 228 million euros. The company has liquid capital of 131 million euros (cash and cash equivalents), available credit of 102 million euros and additional credit of 31 million euros against future income and inventory. The authors of the report note that Keter's rating may drop again if the company does not carry out the debt recycling process in the coming months or that the debt recycling process will cause losses for the lenders.
Keter employs about 5,000 workers, half of them in Israel. The crisis in the company due to the failed management of Pena recently led to the dismissal of about 100 of its employees in Israel.
