TEXT-S&P cuts Nexans S.A. rating to 'BB'
(The following statement was released by the rating agency) Overview -- The combined effects of French cable maker Nexans' cash-funded acquisitions of Amercable and 75% of Shandong Yanggu, and the operational issues it faced in first-half 2012 in the High Voltage Transmission segment have weakened its credit metrics. -- We anticipate that Nexans' credit metrics will fall significantly below our threshold for a 'BB+' rating at year-end 2012. -- We are lowering our long-term rating on Nexans to 'BB' from 'BB+', affirming our 'B' short-term rating, and lowering our issue ratings on the group's debt by one notch. -- The stable outlook reflects our anticipation that Nexans will gradually restore its performance in the Transmission segment and withstand a certain degree of economic slowdown. Rating Action On Sept. 27, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on France-based cable manufacturer Nexans S.A. to 'BB' from 'BB+'. The outlook is stable. At the same time, we affirmed our 'B' short-term corporate credit rating on Nexans. We also lowered our issue ratings on Nexans' following debt instruments to 'BB' from 'BB+': -- The senior unsecured EUR350 million 5.75% notes due 2017, -- The EUR212.6 million 4% convertible bonds due 2016, and -- The EUR275 million 2.5% convertible bonds due 2019. The recovery rating of '3' on these instruments remains unchanged, indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. Rationale The downgrade reflects pronounced weakening in Nexans' credit metrics over the past 12-18 months, owing to the combined effects of the group's cash funded acquisitions of Amercable and a 75% stake in Shandong Yanggu, and the operational issues it has faced in the High Voltage Transmission segment. Operational issues in Nexans' Transmission activity in the first half of this year resulted in disruptions in production and dented group operating margins. Nexans reported a 150 basis-point contraction in operating margins for the first six months of 2012. We expect a gradual recovery in the Transmission segment, leading to an improvement in operating margins in the second half of the year compared with first-half levels. However, the operational issues will likely continue to negatively affect margins during the second half, more so than is generally the case, but to a lesser extent than in the first half. We also anticipate a deterioration in margins in the Distribution & Installers segment in the second half, based on the likely slowdown in the construction market, particularly in Europe. We anticipate that Nexans' adjusted EBITDA margin will be slightly below 5% for full-year 2012. The production disruptions have also negatively affected cash flow, notably working capital, by delaying the delivery of contracts. Without the Transmission operations disruptions, we estimate Nexans' operating cash flow generation would have been about EUR120 million-EUR150 million higher for full-year 2012. Also weighing on Nexans' credit metrics are its cash-funded acquisitions of Amercable in February 2012 and the 75% stake in Shanddong Yanggu, closed in August 2012, for a cumulative cash disbursement of EUR340 million. In addition, in 2011, the group provisioned EUR200 million related to an antitrust enquiry in the EU, which we include in our adjusted debt amount. As a result, we estimate Nexans' adjusted debt at about EUR1.5 billion at year-end 2012, versus EUR847 million at the end of 2010. We anticipate a ratio of Standard & Poor's adjusted FFO to debt of about 15%, slightly negative free operating cash flow (FOCF), and a ratio of adjusted debt to capital of 44% at year-end 2012. These credit metrics no longer meet our guideline for a 'BB+' rating. For 2013, we expect a gradual improvement in Nexans' operating performance and credit metrics, with an adjusted EBITDA margin wider than 5% and adjusted FFO to debt of about 20%, which we consider to be fully commensurate with the 'BB' rating. We base our estimates on the assumption that Nexans' recovery plan in High Voltage Transmission will be successful and result in a complete restoration of operations by the end of 2013. In addition, we believe Nexans will be able to withstand an increasingly difficult macroeconomic environment if necessary because, in our view, its Power Transmission & Distribution activity (which represents close to half of Nexans' revenues) is largely immune to macroeconomic cycles. We also anticipate that Nexans will benefit from its good diversification, both in terms of geographies and end markets. The ratings on Nexans continue to reflect our assessments of its business risk profile as fair and its financial risk profile as significant, under our criteria. We acknowledge the company's leading positions in competitive segments of the cable industry, growing geographic diversification, the increasing weight of higher-value-added products in its total sales, as well as Nexans' still relatively solid capital structure and liquidity. However, the ratings are primarily constrained by Nexans' profitability, with a Standard & Poor's-adjusted EBITDA margin of less than 5% expected at year-end 2012, which is lower than those of most industry peers. Another rating constraint is the cyclicality of some of Nexans' end markets and its exposure to swings in raw materials prices, which can have a heavy impact on working capital. Liquidity We have revised down our assessment of Nexans' liquidity to "adequate" from "strong", under our criteria. This is because Nexans' liquidity cushion has decreased since the beginning of the year, through the Amercable and Shandong Yanggu acquisitions and the cash burn related to the operational issues in the High Voltage Transmission business. Still, Nexans comfortably meets our requirements for adequate liquidity. Relevant aspects of the group's liquidity, based on our criteria, are as follows: -- Sources of cash are likely to substantially exceed uses for the next 12 to 24 months, by 1.5x or more. Cash sources include EUR435 million of unrestricted cash and cash equivalents on June 30, 2012. Nexans also has access to an undrawn EUR540 million revolving credit facility (RCF), which was recently refinanced, and now matures in December 2016. We anticipate discretionary cash flow to be marginally positive in the coming 12 months. -- Cash uses in our base-case scenario include the acquisition of the 75% stake in Shangong Yanggu in the second half of 2012 and the payment of a EUR200 million antitrust fine in 2013. -- The RCF includes customary financial covenants, including a requirement of a maximum unadjusted net debt-to-EBITDA ratio of 3.0x, pro forma for the Amercable acquisition. Headroom under these covenants has decreased but was still comfortable as of June 30, 2012. We anticipate that this will continue to be the case in the coming quarters. Recovery analysis The senior unsecured EUR350 million 5.75% notes due 2017, the EUR212.6 million 4% convertible bonds due 2016, and the EUR275 million 2.5% convertible bonds due 2019, all issued by Nexans, are rated 'BB', in line with the long-term corporate credit rating on the company. The issues have a recovery rating of '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. The issue and recovery ratings on the unsecured debt take into account our view of limited prior-ranking and pari passu liabilities, the potential for cross-jurisdictional insolvency in the event of a default, and the relatively high level of committed debt facilities that are designed to accommodate nonferrous-metals' price volatility. In order to determine recoveries, we modeled a default in 2016. At the hypothetical point of default, we estimate the stressed enterprise value of the company to be about EUR1.1 billion, based mainly on a discounted cash flow valuation. The enterprise value available to the creditors reflects a potential leakage of value to structurally senior, minority-interest holders in operating subsidiaries. We continue to see the fully drawn RCF at default ranking pari passu with the unsecured convertible bonds. Assuming that the convertible bonds are not converted into equity prior to default, we estimate that about EUR1.4 billion of unsecured debt (including prepetition interest) will be outstanding at default, leading to recovery prospects in the 50%-70% range and resulting in the recovery rating of '3'. Outlook The stable outlook reflects our base-case assumption that Nexans will gradually restore its operating performance in the High Voltage Transmission segment over the next 12-18 months. It also factors in the consolidation of the earnings of Amercable and Shandong Yanggu on a full-year basis in 2013. We consider that Nexans is well equipped to face a weaker economic environment, because of its strong geographical and end-market diversity, and the Power Transmission & Distribution business' low sensitivity to macroeconomic cycles. This division represents close to half of Nexans' business. We view an adjusted FFO-to-debt ratio in the 15%-20% range and positive FOCF generation over the cycle as commensurate with the current rating. In addition, we expect the debt-to-capital ratio to remain below 45% at all times. Should Nexans fail to restore its operating performance in the Transmission segment in the coming 12-18 months, we would likely revise down our assessment of the business risk profile and lower the ratings. Also, any markedly negative deviation from our forecasts, leading to largely negative FOCF or any sizeable debt-funded acquisition in the coming 12-18 months, would likely lead us to downgrade Nexans. We could consider a positive rating action on Nexans if it restores its operating performance in the Transmission segment, resulting in significant operating margin improvement. We might also upgrade Nexans if we see a reduction in Nexans' adjusted debt, through FOCF generation over the coming 18-24 months, leading to an improvement in credit metrics to a level solidly commensurate with our assessment of the financial risk profile as significant, and with adjusted FFO to debt in the 20%-30% range. Related Criteria And Research -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- General: 2008 Corporate Critera: Ratios And Adjustments, Apr. 15, 2008 -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' Speculative-Grade Debt, Aug. 10, 2009 Ratings List Downgraded; Ratings Affirmed To From Nexans S.A. Corporate Credit Rating BB/Stable/B BB+/Stable/B Senior Unsecured BB BB+ Recovery Rating 3 3 (Caryn Trokie, New York Ratings Unit)
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