(The following statement was released by the rating agency) Fitch Ratings-Stockholm-February 17: Fitch Ratings has downgraded UK packaging company Amcor plc's Long-Term Issuer Default Rating (IDR) to 'BBB' from 'BBB+'. The Outlook is Stable. The downgrade reflects slower-than-expected deleveraging following Amcor's acquisition of Bemis. While we forecast EBITDA margins to improve to around 15%-16% in 2020-2023, higher-than-expected shareholder returns in the form of increasing dividend payments and the ongoing USD500 million share buyback constrain the company's financial profile. Fitch forecasts that funds from operations (FFO) net leverage will be above 3x in the medium term, which is commensurate with a lower rating, in our view. Amcor's investment-grade profile is supported by the company's leading position in the flexible and rigid packaging markets, strong geographic diversification and exposure to stable consumer industries. Key Rating Drivers Deleveraging Slower-than-Expected: Fitch expects Amcor to deleverage to FFO net leverage of around 3.0x only by financial years to June 2022-2023, versus our previous expectations of 3.1x in FY20. This is roughly in line with the company's leverage target of 2.5x-2.75x on net debt/EBITDA basis. Deleveraging will be driven by positive free cash flow (FCF) generation. We therefore view the slower deleveraging as a rating constraint. Leading Packaging Company: The ratings of Amcor are supported by its worldwide leading positions in flexible and rigid plastic consumer packaging with combined sales of over USD13 billion following the acquisition of Bemis and by its exposure to the stable consumer markets. The acquisition has considerably strengthened Amcor's position in the flexible packaging market and the company's geographical diversification with the contribution from North America expected to equal EMEA's. Low Cash Flow Volatility: We view the cash flow volatility of Amcor, and the packaging sector in general, as low compared with other industrial and natural resource sectors. Amcor's FCF has been more volatile than that of some of packaging peers, mainly due to higher distributions to shareholders, despite lower capex intensity and lower-than-expected EBITDA margins as a result of the Bemis acquisition. Positive FCF Generation Post FY20: Fitch believes Amcor's FCF generation will turn positive in FY21 on the back of increasing margins from the acquisition of Bemis in FY19. Strong FCF is a feature of packaging companies globally, and our expectation of FCF improvement will be important to Amcor's rating trajectory. Acquisitions and Share Buy-Backs: Amcor has announced its USD500 million share buy-back for FY20, following the sale of some of the assets associated with the Bemis acquisition. We expect no additional share buy-backs or further acquisitions over the medium-term, which should help the company to continue its deleveraging. Good Customer Base: Amcor is well-diversified by geography and product Furthermore, it benefits from long-term contracts with its key customers, with pass-through of input costs, limiting exposure to raw- material costs and has co-locational facilities with its customers. Further, the contractual nature of the industry limits over-capacity. Equity-Based Bemis Acquisition: The acquisition of Bemis has been fully equity-based, which favourably compares Amcor to its US-based packaging peers, who rely on debt-funded acquisitions even on a larger scale. Fitch views the prudent approach to larger acquisitions as being supportive of the credit rating. Derivation Summary As one of the leading plastic packaging companies globally and the largest producer of flexible packaging, Fitch views Amcor has having the strongest business profile among its rated packaging peers. Fitch also views rigid and flexible packaging production, given its co-locational nature and longer-term contracts, as more predictable than fiberboard- and lined-paper packaging, supporting higher leverage at a given rating level. Fitch believes Amcor is comparable to Berry Global Group, Inc. (after the acquisition of RPC group) in size, product range and customer-oriented products and end-market exposure with limited sensitivity to economic cycles, albeit with markedly higher FFO net leverage of 5x-5.5x. Sealed Air Corp (NYSE:SEE) also has a similar mix of products, but with EBITDA of about USD900 million, is substantially smaller than Amcor and has FFO net leverage of over 5x. Other packaging peers, such as Ball Corporation (NYSE:BLL), Crown Holdings, Inc., Smurfit Kappa Group plc (SKG) (BB+/Positive) and Stora Enso Oyj (Stora; BBB-/Stable) although comparable in size, operate in different packaging segments (can manufacturing and corrugated packaging, respectively) and can exhibit somewhat different market dynamics and customer mix. While we forecast Amcor's FFO net leverage to fall to around 3.5x by FY21-FY22, it is still higher than that of SKG's and Stora's forecast FY19 leverage of 2.5x. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - Revenue at around USD13.5 billion for FY20, increasing by low single-digits over FY21-FY23 - EBITDA margin at 15%-16% over 2020-2023 - USD500 million share buy-back in 2020 - Dividend payments stable at USD750 million over FY20-FY23 RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action - FFO-adjusted net leverage sustainably below 3.0x (FY19: 5.8x) - FCF margin sustainably above 3% (FY19: -2.5%) Developments That May, Individually or Collectively, Lead to Negative Rating Action - Larger-than-expected acquisitions or increased shareholder returns that result in FFO adjusted net leverage above 3.5x on a sustained basis - FCF margin sustainably below 1.5% Liquidity and Debt Structure Strong Liquidity: At 30-June-2019 Amcor had USD602 million in cash (of which Fitch views USD150million as restricted for working-capital needs and other requirements) and USD2.7 billion of undrawn credit facilities, while short-term maturities stood at USD794 million. The cash position and undrawn credit facilities are enough to finance Fitch-forecast negative FCF for FY20 of around USD140million and the announced share buy-back of USD500 million. Following the merger with Bemis, Amcor has refinanced the legacy loans of Amcor Limited and Bemis Company (NYSE:BMS), Inc with medium- to long-term revolver tranches. Summary of Financial Adjustments Restricted cash of USD150 million for working capital and operational needs. 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 to the way in which they are being managed by the entity. For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. Amcor Limited ----senior unsecured; Long Term Rating; Downgrade; BBB Amcor plc; Long Term Issuer Default Rating; Downgrade; BBB; RO:Sta ----senior unsecured; Long Term Rating; Downgrade; BBB Contacts: Primary Rating Analyst Elisabeth Adeback, Director +46 85510 9442 Fitch Ratings Espana S.A.U. (Spain) Nordic Region Filial Kungsgatan 8 Stockholm 111 43 Secondary Rating Analyst Alexey Evstratenkov, Associate Director +44 20 3530 1089 Committee Chairperson Paul Lund, Senior Director +44 20 3530 1244
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