Kraton says top goal is deleveraging, eyes leverage ratio below 3 times in ‘not too distant future’

By Paul Deckelman

New York, Nov. 28 – Kraton Corp. – which levered up to acquire industry peer Arizona Chemical Corp. in a $1.37 billion transaction about two years ago – has been quickly deleveraging since then, and has set an ambitious target of where it would like to be on that score.

The Houston –based manufacturer of polymers and other chemicals has cut its net debt by nearly $190 million since closing the Arizona deal in early January of 2016, its chief financial officer said on Tuesday, bringing that figure down to $1.54 billion at the end of the 2017 third quarter on Sept. 30, from $1.73 billion at the time the Arizona acquisition closed.

Target: leverage below 3 times

Stephen E. Tremblay, who also serves as executive vice president for Kraton, told participants at the Citigroup 2017 Basic Materials Conference in New York that “in 2016, the first year of the transaction, we delevered by circa $118 million, and our target this year, as previously discussed, was to be another $100-to-$150 million of cash flow, to be applied to reduce debt.”

Tremblay noted that “the business throws off a fair amount of cash flow” – and said that around the middle of this year, “we upped that range [of planned deleveraging] to exclude the low end. In fact, we said that the deleveraging would be somewhere around $125 to the high end of the range of $150 million.”

He said that underlying Kraton’s company strategy “is our firm commitment to delever. We were north of 5 turns of leverage when we closed the transaction, and again, our target would be somewhere south of 3 [times], which we continue to believe is clearly achievable.”

In addition to the $118 million of deleveraging notched last year, Kraton has reduced its net debt by another $69.4 million year-to-date, to reach the nearly $190 million mark. Tremblay said that “we expect to further delever in the [current] fourth quarter of 2017, and we expect that deleveraging to continue to get to a target of less than 3 turns of leverage.”

As to when that milestone would be reached, Tremblay told a conference participant who asked for a target date during the question-and-answer portion of the program that “I’m going to hold off on giving targets for the sub- 3 [times] until we get a little closer to announcing our earnings.

“I will say that we did believe originally when we did the transaction that that would be in 2018.”

However, he said that subsequently, the company indicated that “that’s not going to be the case right now, because of some headwinds in the chemical segment that we’re managing our way through here, but it’ll be in the not too distant future, to get sub-3” times.

He also said that as to whether the company would do any kind of merger-and-acquisition activity while it is trying to get its ratio of net debt as a multiple of trailing 12-month adjusted EBITDA down below the 3 times mark that “we’ll look at a lot of things to create value, and if it takes a leveraging transaction – we’re going to have to be really, really convinced that it’s going to delever quickly.”

Capital markets action

Besides using the considerable cash flow from its own basic polymers business and from the operations it acquired in the Arizona Chemical deal to pay down debt, Tremblay said that the company was active in the capital markets to shape its balance sheet for maximum financial flexibility.

“We’ve done a lot over the last year,” he declared.

For instance, earlier this year, the company sold $400 million 7% senior notes due 2025, which priced at par on March 17 in a regularly scheduled forward calendar transaction, with proceeds used to repay some of the senior secured term loan debt the company had incurred to finance the acquisition.

Tremblay said that this was done in part “to move that capital structure to a more 50-50 balance of bank debt and notes.”

He also noted that “this year, we’ve repriced the term loan twice and we issued a tranche of euro debt to do two things – to take advantage of low interest rates over there, but also to give us a vehicle in Europe where we could apply cash flow tax-efficiently to pay down debt and not have to repatriate earnings here, to effectively service what would have been 100% U.S. debt.

“So we like where we are in terms of mix.”

Tremblay said that the two term loan repricings – one at the start of the year and the second in August – knocked 200 basis points off that the company was originally paying; the first transaction brought the rate on the term loan down to 400 basis points over Libor from 500 bps over on the original loan, both with a 1% Libor floor; then the August transaction brought that down further.

The August transaction was split into two parts – $525 million at 300 bps over Libor, with the 1% floor, and €260 million bearing interest at 250 bps over Euribor, which he said “saved another several basis points of interest.”

Tremblay said that right now, the most urgent priority in the capital structure is $440 million of 10˝% senior notes issued in early 2016 to repay borrowings from the Arizona deal, “hanging over from the acquisition debt – that’s the next thing that we’ve got to address.”

The notes first become callable on Oct. 15, 2018 at a price of 107.875.

“The 10˝s will be out there,” the CFO said, “so we’ve got to start thinking about them.”

© 2015 Prospect News.
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