Investing.com -- Fitch Ratings has placed the ’B-’ Long-Term Issuer Default Rating (IDR) of Ardagh Metal Packaging (NYSE: PKG ) S.A. (AMP (OTC: AMLTF )) under a Rating Watch Evolving ( RWE (LON: 0HA0 )). This follows a downgrade of its parent company, Ardagh Group S.A. (Ardagh), and the persistent risk associated with it.

The RWE indicates that AMP’s rating could be upgraded to its ’b’ Standalone Credit Profile (SCP) if Ardagh loses control of AMP post its proposed capital restructuring. Conversely, the rating could be downgraded if Ardagh’s restructuring fails, leading to a weakened credit profile that impacts AMP. The resolution of the RWE could extend beyond six months, contingent on Ardagh’s restructuring timeline.

AMP’s 2024 performance surpassed Fitch’s expectations, with an EBITDA leverage of 7.4x, lower than the forecasted 7.8x. This was achieved despite a new secured term loan drawdown of EUR269 million. The improved leverage was supported by higher EBITDA, driven by increased sales volumes and stronger input costs recovery. EBITDA generation was also aided by cost savings from the closure of an older, less efficient plant in the U.S. and steel lines in Germany between late 2023 and early 2024.

Fitch predicts EBITDA growth for AMP from 2025 to 2028, primarily due to significant capex completion during 2021-2023 and AMP’s ability to pass on most costs to customers. Despite this, macroeconomic challenges may limit EBITDA improvement. Fitch forecasts AMP’s EBITDA margin at 11% in 2025, increasing to 13% by 2028.

AMP’s Free Cash Flow (FCF) is under pressure, resulting in negative or barely positive FCF margins until 2028. This is despite no significant forecasted capex during 2025-2028. Dividend payments of about USD240 million per year and annual dividends on preferred shares of USD24 million continue to erode FCF generation.

Ardagh, as AMP’s majority 76% shareholder, controls AMP’s strategic decisions, with a significant overlap in the board of directors. Ardagh also provides AMP with services including IT, financial reporting, insurance and risk management, and financing and treasury management via long-term service agreements. However, the presence of minority shareholders in AMP (24% stake is free-float) and their potential influence on strategic decisions is noted.

The RWE reflects uncertainty surrounding the group’s shareholding structure. Ardagh is expected to restructure its debt, and the proposed options include changes to AMP’s shareholding structure. This could lead to a decoupling of AMP from Ardagh, potentially leading to an upgrade of AMP’s rating to its SCP.

AMP’s business profile is weaker than that of higher-rated peers such as Berry Global Group (NYSE: BERY ), Inc. (BB+/Rating Watch Positive) and Silgan Holdings (NYSE: SLGN ) Inc. (BB+/Stable). However, it is offset by AMP’s leading position in the beverage can sector and long-term relationship with customers. AMP compares favorably with CANPACK Group, Inc. (BB-/Positive), which is similarly focused mainly on beverage metal packaging.

Fitch’s recovery analysis assumes that AMP would be reorganised as a going-concern in bankruptcy rather than liquidated. It estimates AMP’s GC EBITDA at USD550 million. The GC EBITDA reflects distressed EBITDA, which incorporates the loss of a major customer, a secular decline, or ESG-related adverse regulatory changes related to AMP’s operations or the packaging industry in general.

The rating could be negatively impacted by further weakening of Ardagh’s credit profile and tighter links between AMP and Ardagh or weakening of AMP’s SCP as underscored by negative FCF margins and EBITDA leverage above 8.0x on a sustained basis. On the other hand, the rating could be positively impacted by a loss of ties between AMP and Ardagh with AMP’s SCP remaining at ’b’.

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