TEXT-Fitch cuts Wurth to 'BBB+' from 'A-'; stable outlook
(The following statement was released by the rating agency)
June 21 - Fitch Ratings has downgraded Adolf Wurth GmbH & Co KG's (Wurth) Long-term Issuer Default Rating (IDR) to 'BBB+' from 'A-'. The Outlook is Stable. The senior unsecured instrument rating of Adolf Wurth GmbH & Co KG and Wurth Finance International B.V. was also downgraded to 'BBB+' from 'A-'. The Short-Term IDR is affirmed at 'F2'.
The downgrade reflects Fitch's base case scenario that Wurth will not be able to generate a free cash flow (FCF) margin of at least 1% in the foreseeable future, which the agency cautioned in November 2011 could prompt a negative rating action. The primary underlying cause for the poorer cash flow generation is a continuous pressure on profit margins due to raw material price increases and inability to completely pass through these increases to their customers. For the years 2001 to 2008, Wurth consistently achieved EBITDAR margins in excess of 10%. Since 2009, EBITDAR margins have been in the range of 8.7% to 9.2% and Fitch does not expect a recovery to pre-crisis levels in the foreseeable future.
In addition to lower profitability, FCF generation is burdened by consistently high working capital needs stemming from quasi-uninterrupted revenue growth, as well as by high capex outlays to finance the expansion strategy. A majority of the capex, representing 4% - 5% of revenues during the past years, is invested in real estate, buildings and other long-term assets.
The 'BBB+' ratings continue to reflect Wurth's inherent qualitative strength within the distribution business, an industry where Fitch sees the best performer's ratings in the high 'BBB' rating category. Wurth's business profile benefits from its large product range and multi-channel distribution ability through site visits, well-stocked outlets, DIY markets and e-business as well as its unrivalled sales staff network and low customer concentration. These strengths mitigate the lack of geographical diversification, with 86% of sales coming from Europe, including 45% from Germany.
The agency expects that, in the medium to long term, the additional emphasis that Wurth is placing on building out relationships with large clients, may reduce the logistical cost burden upon Wurth. In 2011, large clients represented about 5% of total clients but contributed to 62% of total revenues.
The debt maturity profile for 2012 to 2021 is quite flat. Cash and undrawn amounts under committed credit lines for 2011 sum to about EUR 1.018bn. The 2011 net adjusted leverage was 2.2x with adjusted debt amounting to EUR 2.85bn. Fitch does not expect a deleveraging (FFO-to-net lease-adjusted debt) below 2.0x in the foreseeable future.
A negative rating action may occur if the EBITDAR margin drops below 7%, a negative FCF margin is sustained, FFO adjusted net leverage increases above 2.5x, or in case of material capital contributions to the Wurth-owned bank, if the latter experiences financial difficulties.
Wurth acts as a single-source supplier of over 100,000 Wurth-branded, generally low-unit-value components, such as fixtures and auto components, to small- and medium-sized craftsmanship businesses, automotive suppliers, and the manufacturing and construction industry. The ratings continue to reflect the credit profile of the Wurth group in its entirety, which is structured as a horizontal group of legally separate entities under uniform control without a legal parent company.
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