OREANDA-NEWS. Fitch Ratings has upgraded SGD Group SAS's (SGD) Issuer Default Rating (IDR) to 'B' from 'B-' and withdrawn the ratings. Fitch has also withdrawn SGD's senior secured rating of 'B-'/'RR4'. In addition, Fitch has assigned a 'B' IDR to SGD's new top-level parent company, JIC Firmiana SAS (JIC Firmiana). The Rating Outlook is Stable.

These actions follow the acquisition of SGD by JIC Investment Co., Ltd. (JIC), the reorganisation of the group, resulting in the creation of JIC Firmiana as top-level parent. They also follow the refinancing of SGD's debt, including its EUR350m senior secured bond.

The upgrade reflects SGD's improved financial profile following the refinancing of its capital structure and the successful completion of its demerger with the perfumery business. Fitch estimates that the new capital structure will increase Free Cash Flow (FCF) generation by EUR12m in cash interest savings annually. Coupled with a reduction of debt from the refinancing of the group's EUR45m RCF and a EUR31m vendor note with a EUR109m shareholder loan that Fitch treats as equity, the agency expects the group to reduce FFO adjusted leverage below 6.0x in the next 12 to 18 months.

The Stable Outlook assumes that operational risks have diminished, following the completion of the St. Quentin plant and good progress in the ramp-up of Cogent's green-field plant. Execution risks from the group's large investment programme to foster growth are mitigated by efficiency improvement projects and the profitability and long-term growth prospects of SGD's target markets, including type I/II and conversion glass in emerging markets.

The ratings are based solely on SGD's pharma business and exclude the perfumery business, which has been demerged from the group. Fitch assumes that JIC Firmiana is the top-level entity of the group with SGD as the sole operating entity and no other debt obligations on top of EUR350m bank loan, a shareholder loan and SGD's legacy debt. Fitch also assumes that JIC Firmiana and SGD are effectively ring-fenced, so that debt elsewhere in the group has no recourse, cross-defaults or other negative credit effects on JIC Firmiana and SGD.

KEY RATING DRIVERS

Reduced Interest Burden

The refinancing of SGD's debt improves balance sheet strength and deleveraging capacity. As part of JIC's acquisition of SGD, the new owner refinanced SGD's EUR350m bond, EUR31m vendor note and EUR45m RCF with a EUR350m five-year bank loan from the China Construction Bank and a EUR109m shareholder loan. Fitch treats the shareholder loan as equity and therefore does not include the loan in its calculation of debt.

Completion of St. Quentin

The completion of the operational demerger of the pharma glass business from the perfumery glass business is credit positive. The risks of further delays and cost overruns during the two-year relocation of SGD's only type I glass plant were material and previously constrained the ratings.

Cogent Integration On-Track

The ramp-up of Cogent slightly ahead of expectations is credit positive. Cogent will reach an EBITDA margin of around 10% in 2016, although the contribution to the group will remain limited, given its size. The green-field conversion plant adds additional capacity to serve the globally undersupplied market for type I glass, provides access to low-cost production and entry into conversion glass.

Moderate M&A risks

Fitch expects management to refocus on driving growth and profitability, following completion of the St. Quentin plant and SGD's acquisition by JIC. Bolt-on M&A brings modest incremental execution risks, given that management intends to spend around EUR25m to EUR30m on one target annually.

Fitch considers SGD's M&A strategy of capturing growth in conversion type I glass as sound, given the global undersupply of type I glass and its high and defendable margins. Conversion glass also complements SGD's existing market leadership in moulded glass well and offers cross-selling opportunities. We expect global growth in population, life expectancy, chronic diseases and growing demand for healthcare and pharma in emerging markets to fuel demand for pharma packaging in the long-term.

Ambitious Growth Plans

Fitch considers management's organic growth plans moderately credit positive. Targets are ambitious, but the implementation will support profitability and cash generation in the long term. SGD plans to grow revenues to EUR380m and increase EBITDA margin to 26% in 2020, not including M&A. Management intends to achieve this through a focus on type I/II and conversion glass and emerging markets, leveraging on its distribution network, capacity increases and cost savings. The associated capex requirements will reduce Free Cash Flow generation over the next four years, although capital intensity will remain in the low-teens and well below 2015 levels.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for SGD include:

--Long-term organic revenue growth of 2.5%.

--Stable to improving operating profit margins above 25%, supported by margin accretive M&A.

--Normalised maintenance capex of around 10% of revenue, following the operational separation of the perfumery and pharma businesses.

--Annual bolt-on acquisition of one target of around EUR30m.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Continued deleveraging with limited deviation from investments, resulting in FFO adjusted gross leverage sustainably below 4.5x and

--Consistently positive FCF.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Aggressive investments or large cost overruns, resulting in

--FFO adjusted gross leverage above 6.0x and

--Negative FCF.

LIQUIDITY

Liquidity is adequate. Fitch estimates that liquidity comprises around EUR15m in unrestricted cash and EUR2m in undrawn committed facilities at the closing of the refinancing on 6 October 2016. This is sufficient to cover around EUR7m in roll-over debt, which Fitch assumes will mature in the next 12 months in its liquidity analysis.

FULL LIST OF RATING ACTIONS

SGD Group SAS

Long-Term IDR: upgraded to 'B' from 'B-' and withdrawn; Outlook Stable

Senior secured debt: withdrawn at 'B-'/'RR4'

JIC Firmiana SAS

Long-Term IDR: assigned at 'B'; Outlook Stable;