TEXT-S&P rates Brand Energy & Infrastructure Services loan 'CCC+'
Overview -- Kennesaw, Ga.-based Brand Energy & Infrastructure Services (Brand) plans to issue a new $325 million senior secured second-lien credit facility. -- Brand will use this, along with the previously announced first-lien term loan and existing cash, to refinance all of its existing debt. -- We are assigning our issue-level rating of 'CCC+' to the company's proposed $325 million second-lien term loan facility. -- The stable outlook reflects our expectation for Brand's leverage to improve to about 6x over the next 12 months and that the financing will be completed. Rating Action On Oct. 11, 2012, Standard & Poor's Ratings Services assigned its 'CCC+' issue rating and '6' recovery rating (indicating our expectation of negligiblerecovery in the event of payment default) to Brand Energy & Infrastructure Services' proposed $325 million second-lien term loan. Our 'B' corporate credit rating and stable outlook on Brand remain unchanged. At the same time we revised our recovery rating on the proposed first-lien term loan and revolving credit facility to '3' from '4' as a result of a greater pledge to the first-lien lenders from the company's Canadian subsidiary (Aluma Systems Inc., which is now a borrower under a $150 million first-lien term loan tranche). The '3' recovery rating indicates our expectation of meaningful (50%-70%) recovery. Brand is the borrower of the proposed first-lien $75 million revolver and first-lien $550 million term loan facility. The 'B' issue-level ratings on all these facilities remain unchanged. Our 'BB-' issue rating and '1' recovery rating (very high recovery of 90%-100%) on Brand's $50 million first-lien letter-of-credit facility also remain unchanged. All ratings are subject to a review of final documentation. Rationale The ratings on Brand reflect our view of the company's "highly leveraged" financial profile and "weak" business profile. The stable outlook indicates our expectation for sustained low double-digit EBITDA margins on slow demand recovery in its end-markets, our expectation leverage will fall to about 6x over the next 12 months, and that its proposed refinancing extends maturities on all of its existing debt. Our financial risk assessment reflects Brand's high leverage and modest cash flow generation prospects over the next two years, and the overall business risk assessment reflects its exposure to volatile end-markets and competitive pricing. We expect Brand to remain one of the largest providers of work access (i.e., scaffolding) and multicraft services in North America, with customers primarily in the energy sector--in particular, refineries--and, to a lesser extent, utilities. Although some of its end markets are cyclical, maintenance services (roughly two-thirds of revenues) tend to be more resilient to recessions. Contract terms between three and five years (although customers can cancel these on a relatively short notice) should continue to provide some earnings stability. Brand also has a commercial business, which is more project-focused, less recurrent, and accounts for only about 8%-10% of revenues. After being delayed during the economic downturn, maintenance and plant turnaround activity is slowly picking up across Brand's end markets. We expect demand for maintenance services in Brand's energy and industrial markets to modestly grow, at least in line with U.S. GDP, and for pricing to remain competitive. Brand's EBITDA margins have been improving over the past few quarters after they weakened as a result of price concessions that the company offered in response to competitive pressures. Also, some customers delayed maintenance capital expenditures over the past downturn. Given some improvement in demand, where possible, Brand has renegotiated some of its contracts, which we will continue to monitor with respect to our base-case assumptions for its operating performance over the next two years. Our base case scenario assumptions for Brand include: -- Revenue will grow at about a mid-single-digit rate for the remainder of 2012 and 2013 mainly as a result of business wins in 2011 in its petrochemical end-markets and slow economic recovery driving low growth in its refining- and oil sands-related end-markets. -- EBITDA margins will rise by at least 100 basis points over 2011 levels to about 10% or more over the next two years (after incorporating ongoing pricing pressure), because of overall sales recovery, absent any meaningful contract losses or productivity losses from potentially severe weather. -- Leverage will improve to about 6x or less over the next two years with low, but positive, free cash flow generation prospects over the cycle. We view Brand's financial risk profile as highly leveraged, given pro forma leverage (including our adjustments) of more than 6.5x as of June 30, 2012, and our expectation for leverage to remain above 6x for the next 12 months. We expect some gradual improvement, although these metrics will likely remain at the lower end of our expectations. For the rating, we expect adjusted debt to EBITDA of about 6x or less and free operating cash flow (FOCF) to total debt in the low-single-digit area. The company's liquidity position has improved given it has extended its proposed revolver maturity to 2017 from February 2013. However, we believe higher interest expenses following the refinancing will somewhat constrain future cash flow generation. Liquidity We believe Brand has adequate liquidity. Our assessment of Brand's liquidity profile incorporates the following expectations and assumptions: -- We expect sources of liquidity, including available cash and funds from operations, to exceed uses by 1.2x or more over the next 12 months; -- We believe net sources would remain positive even if EBITDA declines by 15%; and -- The proposed first-lien credit agreement would contain a first-lien net leverage covenant if the revolver is more than 50% drawn, which we do not expect in our base case. We expect at least 15% cushion on its first-lien net leverage covenant. The second-lien facility contains no financial covenants. Liquidity sources as of June 30, 2012, were adequate to cover near-term uses, with roughly $65 million of cash (pro forma) on the balance sheet (including $50 million of restricted cash) and an undrawn $75 million revolving credit facility (matures 2017) after refinancing. Given the proposed first-lien net leverage ratio requirements, Brand's access to its revolver is no longer limited to 50% of the $75 million facility, minus outstanding letters of credit. Despite higher interest expenses following the refinancing, we do incorporate benefit to cash flow from meaningful interest expense savings following the rolloff of $525 million of swaps earlier this year and another swap maturity in February 2013. We expect uses of liquidity over the next 12 months to include approximately $30 million to $40 million in capital expenditures (net of proceeds from used equipment) and roughly $20 million to $25 million in working capital. We believe the proposed refinancing of Brand's existing capital structure has improved financial flexibility by extending debt maturities beyond 2015. Recovery Analysis For the complete recovery analysis, see the recovery report on Brand to be published on RatingsDirect after this report. Outlook Our stable outlook reflects our expectation for improved financial flexibility given that Brand is extending the maturity on all its existing debt. Also, over the next 12 months we expect Brand to sustain recent improvements in EBITDA margins, given its recent ability to mitigate pricing pressures. Leverage should improve toward 6x, assuming industry activity picks up to historical levels, which is likely because customers can only generally delay maintenance work temporarily. We could consider a downgrade if the proposed transaction does not close or if we believe Brand would not reduce leverage toward 6x or less because of renewed pressure on EBITDA margins, leaving it vulnerable to eventual refinancing risks. A downgrade also could occur if Brand's liquidity profile deteriorates on end-markets that are weaker than we expect for a prolonged period, leading to customers delaying maintenance work over the near term, or if Brand loses maintenance projects altogether. An upgrade is unlikely over the next 12 months given our expectations for company's financial risk profile to remain highly leveraged. Following the recent refinancing of Brand's second-lien debt, we believe the increased likelihood that leverage will remain about 5x or less would be a significant factor for any positive rating action on the company over the next year. Related Criteria And Research -- Economic Research: U.S. Economic Forecast: He's Buying A Stairway To Heaven, Sept. 21, 2012 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Brand Energy & Infrastructure Services Corporate Credit Rating B/Stable/-- Brand Energy & Infrastructure Services Senior Secured LOC loan BB- Recovery Rating 1 Senior Secured Second Lien CCC+ Recovery Rating 6 Ratings Affirmed; Recovery Ratings Revised To From Senior Secured Revolver, First Lien B B Recovery Rating 3 4 New Rating Brand Energy & Infrastructure Services Senior Secured US$325 mil sr secd 2nd lien term due 2019 CCC+ Recovery Rating 6 Aluma Systems Inc. Senior Secured US$150 mil 1st lien term bank ln due 2018 B Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.