Moody’s Investors Service has changed the B2 rating outlook for the TenCate Grass Group from stable to negative.
The adjustment reflects Moody’s expectations that the acquisition of U.S. company Hellas Construction as well as the acquisition of Geo Sport Lighting in Q1 this year, will delay the TenCate Grass Group deleveraging.
TenCate Grass plans to upsize the senior secured term loan B to about €590 million from €315 million and the senior secured revolving credit facility to €90 million from €65 million. Proceeds of the incremental term loan will fund the company’s contemplated acquisitions of Hellas in May 2022 for approximately €367 million, as well as repay outstanding drawings under the senior secured revolving credit facility due to the acquisition of Geo Sport Lighting, and pay transaction costs. Crestview, a US private equity firm which owns the majority of TCG, will also contribute equity financing, which together with equity rolled over from Hellas and TCG management comprises about 30% of the total purchase price.
At the same time the acquisitions enhance the company’s business profile with increased sales diversification and access to the strongly growing market for sports fields, especially in the South of the US, as well as greater scale, with pro forma revenue estimated at about €864 million in 2021 compared to about €500 million standalone. The company envisages to raise up to €10 million of synergies from the transaction by end of 2022. Hellas is the largest downstream installer of artificial turf in the US, which designs projects and manufactures the installed turf.
Moody’s provides six reasons for the adjustment:
- TCG’s B2 corporate family rating (CFR) is weakly positioned considering its relatively small albeit improved size with €864 million of revenue in 2021 pro forma for the acquisitions;
- its aggressive financial policy and relatively high leverage for the B2 rating at above 6.0x expected at year end 2022 and only falling below 5.5x by the end of 2023;
- its fairly limited product and production diversification with 7 manufacturing plants producing artificial turf for sports and landscape end-markets;
- its highly competitive end markets, especially in the sports segment (about 80% of EBITDA in 2022) where most new contracts are awarded through public or private tenders;
- the execution risk to integrate Hellas and the numerous bolt-on acquisitions and to achieve the envisaged synergies; and
- the relatively modest starting cash position.
Since 2017 TCG expanded along the entire artificial turf value chain through organic growth and the acquisition of about 15 small to medium size companies. Moody’s expects TCG to continue to direct the majority of its free cash flow to further consolidate the fairly fragmented industry and strengthen its market position. Continuous bolt on acquisitions will likely help to deleverage the group’s balance sheet through incremental EBITDA at favorable multiples, but at the same time expose the company to meaningful integration risk and potentially require additional financing.
Governance considerations have been a driver of the rating action. Private equity firm Crestview and management own TCG. Private equity funds tend to have higher tolerance for leverage, a greater propensity to favor shareholders over creditors as well as a greater appetite for debt-funded M&A to maximize growth and their return on their investment.
The proposed upsize of the senior secured revolving credit facility to €90 million from €65 million, as well as balance sheet cash support adequate, albeit relatively tight, liquidity for TCG. Moody’s expects revolver drawings of about €21 million and only €16 million of cash on balance sheet to finance day to day cash needs pro forma for the closure of the transaction. The rating agency expects TCG to generate €1 millon to €10 million free cash flow in 2022 (mainly due to a working capital built up of €25 million driven by cost inflation in combination with growing sales and high growth capex of €31 million), which is likely to redeem a part of the drawn portion of the RCF and to fund bolt on acquisitions on an opportunistic basis.
The RCF has a springing net leverage covenant at 8.0 times, which only will be tested if the RCF is drawn by more than 40%. Moody’s expects TCG to remain well below the covenant level if tested.