Moody’s Investors Service changed its debt ratings outlook on Newell Brands Inc. to stable from positive.

At the same the time, the rating agency affirmed Newell Brands Inc.’s Ba1 Corporate Family Rating (“CFR”), Ba1-PD Probability of Default Rating (“PDR”), Ba1 senior unsecured debt instrument ratings, and NP (not prime) commercial paper rating. The outlook on its Speculative Grade Liquidity Rating (“SGL”) was changed to SGL-2 from SGL-1.

The affirmation reflects Newell’s large scale, good, albeit weaker, operating performance, and sound operating profit margin.

Moody’s said, “Although the company has executed well on its strategic goals and commitment to returning to organic growth, the weaker economic environment and inflationary pressure on consumers brings elevated risks over the next 12-18 months. These factors drive the outlook revision to stable since an upgrade to investment grade is not likely when earnings are weakening. Moody’s expects that demand for discretionary products such as home fragrance, small home appliances, household food storage and outdoor & recreational products will remain under pressure particularly following a surge in demand during the global pandemic. Additionally, the company’s ability to take pricing actions to offset volume declines will be limited during this period as retailers become more timid with orders and push back on suppliers to reduce prices. Bloated inventory levels at Newell may lead to discounting in order to move products quicker through the channel and to retain market share in a competitive environment. Despite the weaker economic outlook, Moody’s affirmed Newell’s Ba1 CFR because any cyclical weakness is likely to be temporary and the company remains focused on maintaining a moderate financial policy. However, uncertainty and downside risks remain high during this period.

“Moody’s expects that financial leverage will remain elevated at around 4.0x to 4.5x debt-to-EBITDA over the next 12-18 months compared to 4.7x as of September 30, 2022, with the leverage decline largely due to debt repayment.  Given the weak economic environment, it is unlikely the company will be able to materially reduce leverage during this period especially given it is also focused on paying a sizable dividend to its shareholders. Newell has a stated target net debt-to-EBITDA leverage ratio of 2.5x (based on the company’s calculation), which is quite modest compared to its 3.9x leverage ratio as of September 30, 2022.  Moody’s expects free cash flows (which also accounts for the dividend) to total $225 million to $275 million over the next 12-18 months as higher-than-usual working capital is reduced.  Moody’s also expects the company will use this free cash flow towards debt repayment given its current stated leverage target.”

“The downgrade to SGL-2 reflects earnings pressure over the next 12 months and that the significant working capital usage in 2022 will take time to work down, leading to higher revolver borrowings than previously anticipated. The SGL-2 nevertheless reflects that Newell’s liquidity remains good with expected cash on hand of $400 million by December 31, 2022, unused capacity on the $1.5 billion unsecured revolving credit facility expiring in August 2027 (unrated) and $375 million under the accounts receivable securitization facility expiring in October 2023. The company had $1.1 billion in bonds that were set to mature in April 2023, but they were redeemed in October 2022.”