Moody's Provides Ba1 Rating to Silgan, Shares Fall - Analyst Blog


Shares of Silgan Holdings Inc. ( SLGN ) dropped around 1.5% after Moody's Investors Service - the rating unit of Moody's Corporation ( MCO ) - assigned a Ba1 rating to the proposed senior secured revolver and term loans. The stock closed at $46.65 at the end of trading on Jan 17.

On the other hand, Moody's reaffirmed Silgan's Ba1 corporate family rating (CFR). The rating is attributable to the consolidated industry structure in Silgan's metals segment and strong market shares and contract structures in food cans.

The rating also reflects the presence of a significant number of customers in the food can segment and custom products in the plastics segment. However, the rating is also constrained by inherent risks pertaining to Silgan's acquisition strategy and low growth in the food can market.

In addition, Silgan's probability of default (PDR) rating has been affirmed at Ba1-PD. The ratings outlook has also remained stable. These ratings came on the back of Silgan's focus on cost cutting and productivity improvement. It also reflects Silgan's expansion into higher growth markets. Silgan also maintains good liquidity.

However, weaker contract terms in the plastic vacuum closures and plastics segments as well as volatile resin prices remain as looming concerns. Additionally, the industry structures for both plastic segments are fragmented with significant competitive pressure.

Moody's is cautious about Silgan's high leverage for the rating category. Moody's also stated that the ratings could be downgraded if the earnings before interest, taxes, depreciation and amortization (EBITDA) or interest coverage stays above 3.5x, free cash flow to debt remains below 9.5% and EBIT to interest expense declines to below 4x.

Additionally, significant debt financed acquisitions may prompt a downgrade as well. The rating agency is apprehensive about deterioration in the operating and competitive environment, fall in credit metrics and change in financial policies.

For 2013, Silgan lowered its expectation for adjusted earnings per share to the band of $2.75 to $2.85. The company will benefit from its successful acquisitions, increasing productivity and cost containment initiatives.  However, soft demand in Europe continues to be a challenge.

Silgan's exposure to Europe has increased following its Vogel & Noot acquisition and expansion of the Closures segment in the region. Additional pricing pressure is expected as the European scenario will likely remain tough over the next few quarters.

Stamford, Conn.-based Silgan is a leading manufacturer of consumer goods packaging products, operating 81 manufacturing facilities in the Americas, Europe and Asia. In North America, Silgan is the largest supplier of metal containers for food products and a major supplier of plastic containers for personal care products.

Currently, Silgan has a Zacks Rank #3 (Hold). However, not all stocks in the industrial products sector are performing as poorly as Silgan. Some better-ranked stocks in the same sector include Ball Corp. ( BLL ) and AptarGroup, Inc. ( ATR ). Both these stocks carry a Zacks Rank #2 (Buy).

APTARGROUP INC (ATR): Free Stock Analysis Report

BALL CORP (BLL): Free Stock Analysis Report

MOODYS CORP (MCO): Free Stock Analysis Report

SILGAN HOLDINGS (SLGN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: ATR , BLL , CFR , MCO , SLGN

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