ARDAGH METAL PACKAGING S.A.
Fitch Ratings has downgraded
A full list of rating actions is below.
The downgrade reflects continued underperformance of Ardagh compared with our expectations and the announcement on
Despite the ability to now address its 2025 debt repayment, we view the current capital structure of the group as unsustainable given its ongoing weak operating performance and upcoming
Key Rating Drivers
Excessive Refinancing Risk: Refinancing risk has risen considerably due to a limited recovery in EBITDA, increased leverage, a material interest burden, and a complex capital structure that limits financial headroom and flexibility. While the Apollo deal addresses the 2025 SSN maturity, we view refinancing risk as excessive with material debt maturities in
Unsustainable Debt Structure: Fitch's rating case does not include the sale of Ardagh's stake in
Announcement not a DDE: Fitch does not view the announced steps as a distressed debt exchange (DDE) under its criteria. We will review any possible steps to address refinancing where, for example, tender offers and exchanges of existing debt, including a material reduction in creditor terms, taken to avoid a probable default of the issuer, would constitute a DDE and drive further ratings downgrade.
Weaker Performance: Factors such as significant glass packaging inventory adjustments, lower beer sales volumes in
Margins to Recover Gradually: In 1Q24 Ardagh's EBITDA margins for the glass business fell to 11.7% (management data), from 18.6% in 1Q23, although we expect it to improve in 2H24 on expected demand recovery. Nevertheless, we have revised down our expectations of Ardagh's Fitch-adjusted EBITDA margin to 11.2% in 2024 versus 12.5% previously and 10.5% in 2023. We expect a gradual margin recovery to 12.5% by 2025 and to 13.4% in 2026.
Delayed Cash Flow Recovery: Due to expected lower EBITDA generation we forecast that FCF will continue to be negative in 2024 and to turn marginally positive in 2025. This is despite projected capex reduction and limiting dividends distributions to only its non-controlling interests in its subsidiary AMP. The new debt provided by Apollo will restrict Ardagh's ability to pay dividends after
Solid Business Profile: Ardagh maintains a strong business profile, with large scale and a focus on the comparatively predictable beverage sector that generates approximately 85% of its revenue, and the remainder from food packaging. The group also enjoys substantial geographic diversification, with operations in the mature markets of EMEA and
Derivation Summary
Fitch views Ardagh's business profile as strong and similar to that of peers, such as
Ardagh's multi-tiered capital structure is highly leveraged, with EBITDA gross leverage above 12x at end-2023 and forecast at above 11x at end-2024, far higher than that of a majority of packaging companies in the speculative grade, such as
Fitch-forecast EBITDA margins (11%-12.5% in 2024-2025) for Ardagh are comparable with higher-rated CANPACK's (10%-11%), but slightly weaker than
Key Assumptions
Revenue to rise about 2.5% on average during 2024-2027, supported by volume growth, in particular, recovery in glass packaging demand and metal can production ramp-up
Constrained EBITDA margin recovery in 2024 to 11.2% followed by a recovery to 12.5% in 2025, 13.4% in 2026 and 14.5% in 2027 on better production capacity utilisation
No cash interest paid on the PIK notes at
Dividends paid by AMP to its minority shareholders of around
Capex as a share of revenue at around 6.0% in 2024 followed by a reduction to 5.7%-5.8% in 2025-2027
AMP's
Refinancing of
Recovery Analysis
The recovery analysis assumes that Ardagh would be reorganised as a going concern (GC) in bankruptcy rather than liquidated
A 10% administrative claim
Recoveries for debt at Ardagh exclude debt that is issued by AMP, which are under separate agreements (restricted group) and ring-fenced from Ardagh
Fitch estimates the GC EBITDA of the glass business at
An enterprise value (EV) multiple of 5.5x is applied to GC EBITDA to calculate a post-reorganisation valuation. It reflects Ardagh's leading position in the glass beverage packaging industry, long-term relationship with clients and a diversified customer base. This is in line with that of other packaging peers rated by Fitch.
A GC EV includes the book value of
Under the current capital structure prior to the refinancing at AIHS, our waterfall analysis generates a ranked recovery for Ardagh's SSNs in the 'RR2' category, leading to a 'B-' rating. The waterfall-generated recovery computation output score is 77%. For Ardagh's senior unsecured notes the score is at 0% leading to 'CC'/'RR6' and for ARD Finance SSNs also at 0% equivalent to 'C'/'RR6'
Assuming the new capital structure after the refinancing at AIHS, Ardagh's SSNs will have an estimated output score of 73%, equating to a 'B-'/'RR2' instrument rating; its senior unsecured notes at 0% equivalent to 'CC'/'RR6' and
RATING SENSITIVITIES
Factors That Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Material recovery in EBITDA generation leading to a reduction of EBITDA gross leverage
Progress in addressing upcoming maturities that does not constitute a DDE
EBITDA interest coverage above 1.5x
Factors That Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Lack of progress in addressing upcoming maturities
Announcement of a debt exchange or other form of debt restructuring, which Fitch would view as a DDE
EBITDA interest coverage below 1.0x
Liquidity and Debt Structure
Liquidity Still Weak: As at end-1Q24 Ardagh reported about
The proposed refinancing of the
Complex Debt Structure: Ardagh has a complex debt structure with a series of senior secured and unsecured notes with the nearest maturity in
Issuer Profile
Ardagh is one of the largest producers of metal beverage cans and glass containers primarily for the beverage and food markets. With production facilities across
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Ardagh has an ESG Relevance Score of '4' for Management Strategy due to its complex funding strategy, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Ardagh has an ESG Relevance Score of '4' for Group Structure due to the complexity of ownership and funding structure, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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