TEXT-S&P rates Manitowoc Co notes 'B+'
Overview -- Wisconsin-based crane and food service equipment manufacturer Manitowoc Co. Inc. has issued $300 million of new senior unsecured notes due 2022 and expects to use proceeds to redeem its $150 million of senior notes due 2013 and to repay borrowings under the senior secured credit facility. -- We are assigning a 'B+' issue-level rating to the proposed senior unsecured notes with a recovery rating of '4'. -- We are affirming our 'B+' corporate credit rating on the company. -- The stable outlook reflects our expectation that Manitowoc's end markets will grow modestly over the next year. Rating Action On Oct. 5, 2012, Standard & Poor's Ratings Services affirmed its 'B+' corporate credit rating on Manitowoc Co. Inc. The outlook is stable. At the same time, we assigned a 'B+' issue-level rating and a '4' recovery rating to the company's proposed $300 million senior unsecured notes due 2022. The '4' recovery rating indicates expectations for an average (30% to 50%) recovery in the event of default. We are also affirming our 'BB' issue-level rating and '1' recovery rating on the company's credit facilities and our 'B+' issue-level rating and '4' recovery rating on the company's other senior unsecured notes due 2018 and 2020. A '1' recovery rating indicates our expectation of very high (90%-100%) recovery. Manitowoc plans to use the proceeds from the notes issuance to redeem its $150 million senior notes due 2013 and to repay a portion of its outstanding borrowings under its revolving credit facility. Rationale The ratings on Manitowoc reflect the company's "aggressive" financial risk profile, characterized by high debt and aggressive financial policies, which more than offsets its "fair" business risk profile. We expect the company's revenues to increase as the crane segment continues its recovery alongside a modest improvement in the food service segment. The company's credit measures have modestly improved with the gradual recovery in the crane end markets. We believe they will improve further but will likely still remain weak for the rating over the next few quarters. We believe that the company will pay down debt with the free cash flow it generates. Manitowoc's cash balance and ample availability on its revolver, plus our expectation of positive free cash flow generation for the year, should continue to support its adequate liquidity. The company is one of the top two crane manufacturers serving the cyclical construction markets and is one of the top two manufacturers by market share of major products in the more-stable food service markets. We believe the company should continue to maintain good customer, product, and geographic diversity, with about half of its revenues coming from outside the U.S. It also maintains low-cost and efficient global manufacturing operations. We estimate sales in the crane business will account for about 60% of total revenues and sales in the food service segment for about 40%. In our opinion, the operating environment has stabilized some but likely will remain challenging in the near term, especially for the crane business. We expect further stabilization and the gradual recovery to continue through year-end and into 2013. The crane segment's backlog was about $944 million as of June 30, 2012--a significant increase from year-end 2011 levels. We estimate revenues will rise about 7% for 2012. We expect revenue growth in the crane segment of 8%-9%, similar to our economists' current forecast for residential and nonresidential construction and equipment spending. We believe increasing global demand will contribute to longer-term prospects. We believe the food service segment will improve modestly, with revenues increasing roughly 2%, in line with the economy. This growth projection is similar to our economists' current view on U.S. GDP growth for consumer spending. We estimate the EBITDA margin will remain somewhat steady at about 10%-11%, reflecting the expected recovery in the crane end markets and modest improvement in its food service segment. For the quarter ended June 30, Manitowoc's sales increased by roughly 6% year over year because of better sales volumes in both the crane and food service segments. We believe higher volumes, continued growth in domestic end markets, the rise in demand in emerging markets, and overall cost control measures should improve profitability modestly over time. The company's EBITDA margin was about 12%--stable compared with the same period in 2011. We view Manitowoc's financial profile as aggressive. Total debt to EBITDA as of June 30, 2012, was about 5.5x and funds from operations (FFO) to total debt was about 11%. We believe credit metrics will improve further but will remain somewhat below our expectations over the next few quarters. The company likely will use its free cash flow, which we estimate to be more than $100 million, for debt reduction, strengthening credit measures. For the current rating, we expect total debt to EBITDA of about 4x-5x and FFO to total debt of 10%-15%. Liquidity We believe Manitowoc has adequate sources of liquidity to cover its needs in the near term, even if EBITDA were to unexpectedly decline. The company's has scheduled annual debt amortization of roughly $40 million annually, and no near-term debt maturities. Our assessment of Manitowoc's liquidity profile incorporates the following expectations and assumptions: -- We believe the company's sources of liquidity, including cash and facility availability, will exceed its uses by at least 1.2x over the next 12 months. -- We believe net sources will remain positive, even in the unlikely event of a 15% decline in EBITDA. -- We expect that under its financial covenants (including a senior leverage covenant of 3.5x at year-end 2012), the company would remain in compliance even if EBITDA were to drop by about 15%. Liquidity sources as of June 30, 2012, include cash and short-term investments of about $60 million and ample availability under its $500 million revolving credit facility maturing in 2016. The primary uses of liquidity in 2012 will include roughly $80 million in net capital expenditures. We also believe Manitowoc will generate more than $100 million in free cash flow and use this amount primarily for debt reduction. Recovery analysis See the recovery report on Manitowoc, to be published soon on RatingsDirect. Outlook The outlook is stable. Although credit measures remain weaker than our expectations for the rating, we believe they will improve and approach levels more in line for the rating as a result of a modest recovery in crane end markets and stable performance in its food service business. We could lower the ratings if the recovery of the crane end markets falters and causes deterioration of credit measures or hurts liquidity--for example, if FFO to total debt appears likely to be less than about 10% in the near term. We could raise the ratings if operating prospects improve meaningfully and the company's liquidity and credit measures support this trend. However, we consider an upgrade in the near term unlikely because we regard the company's current credit protection measures as weak for the rating and we don't think they are likely to improve sufficiently to support a higher rating. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Manitowoc Co. Inc. Corporate Credit Rating B+/Stable/-- Senior Secured BB Recovery Rating 1 Senior Unsecured B+ Recovery Rating 4 Manitowoc EMEA Holdings Sarl Senior Secured BB Recovery Rating 1 Manitowoc Holding Asia SAS Senior Secured BB Recovery Rating 1 New Rating Manitowoc Co. Inc. $300 mil sr unsecd nts due 2022 B+ Recovery Rating 4