TEXT-S&P cuts Terex debt rating to 'B+', affirms 'BB-' corp credit
Overview -- Construction and industrial equipment manufacturer Terex Corp. plans to issue $850 million senior unsecured notes due 2021, and the increased amount of outstanding unsecured notes after the transaction will reduce recovery prospects for this class of debtholders. -- We are assigning our 'B+' issue-level and '5' recovery rating to the proposed notes and lowering our rating on the company's other existing senior unsecured notes to 'B+' from 'BB-'. -- We are affirming our other ratings on the company, including the 'BB-' corporate credit rating. -- The stable outlook reflects our expectation for continued improvement in credit measures in 2013 to levels consistent with the rating. Rating Action On Nov. 7, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' corporate credit rating on Terex Corp. The outlook is stable. We also lowered our rating on the company's existing senior unsecured notes to 'B+' from 'BB-'. The recovery rating has been revised to '5', indicating our expectation for modest (10%-30%) recovery in a default scenario, from '4'. At the same time, we assigned 'B+' issue-level and '5' recovery ratings to the company's proposed $850 million senior unsecured notes, which are to be issued through separate U.S. dollar-denominated and euro-denominated offerings. Both the U.S. dollar and euro issues will be guaranteed by Terex Corp. and certain wholly owned domestic subsidiaries. The U.S. dollar notes will be issued by Terex Corp. The issuer of the European notes is Terex International Financial Services Co., an Irish subsidiary of Terex Corp. Rationale The downgrade of Terex's unsecured notes reflects the increased amount of outstanding notes after the transaction that reduces recovery prospects for this class of debtholder. We affirmed our other ratings on the company because we believe operating performance will continue to improve next year, bringing credit measures in line with our expectations for the rating. Terex expects to use proceeds from the issuance to refinance $800 million of subordinated notes due 2017 and to pay related fees and expenses. The ratings on the Westport, Conn.-based construction and industrial equipment manufacturer reflect Standard & Poor's assessment of the company's "aggressive" financial risk profile and "fair" business risk profile. We expect that operating performance will continue to improve in 2013 as the global economy continues its slow recovery. The company should also benefit from its acquisition of 82% of the shares of Demag Cranes AG (not rated), a Germany-based supplier of industrial cranes, port technology, and related services, in August of 2011 for about $1.1 billion. We expect Terex to generate about $7.5 billion in sales and for its adjusted EBITDA margin in 2012 to be about 9%, benefiting from higher volumes and its 2011 restructuring. Next year, we forecast revenue growth to decelerate to the mid-single digits but expect continued modest improvements in profitability to result in 10% or higher adjusted EBITDA margin. We believe this will support improved credit measures, including adjusted debt to EBITDA of less than 4x and funds from operations (FFO) to total debt of about 20%, which would meet our expectations for the rating after several years of very weak credit measures. Terex manufactures a broad range of equipment for the construction and infrastructure industries. The company operates in the highly cyclical and competitive construction equipment industry, and its profitability can be volatile. However, we expect it will maintain good positions in some niche construction-related markets--such as its No. 2 position in the aerial work platform market. Terex has good geographic diversity. Europe and the U.S. each account for close to 30% of sales, and about 40% comes from the rest of the world. Terex also has decent product diversity across its five reporting segments. We consider Terex's financial risk profile to be aggressive because of its acquisitive strategy and our expectation for significant swings in cash flow generation through the operating cycle. Credit measures have recently been weak for the rating in recent years, but we expect them to meet our expectations in 2013. At the rating, we expect Terex to maintain FFO to total debt of 15%-20%, but metrics are likely to be volatile. Decent cash balances and a manageable maturity profile also support the ratings. Terex has also increased its credit offering to customers through Terex Financial Services (TFS). The scale of this operation is modest, with about $142 million in assets at the end of the third quarter, and we do not anticipate rapid growth in the near term. Liquidity Liquidity is "adequate." Our assessment of the company's liquidity profile incorporates the following expectations and assumptions: -- We believe sources of funds will exceed 1.2x uses over the next year. -- We expect net sources of funds to remain positive even in the event that EBITDA declines by 15%. -- We believe the company has generally prudent financial risk management and sound relationships with banks. Under its credit facility (closed June 2011 and amended and repriced in October 2012), the company is subject to a minimum interest coverage covenant and a maximum senior secured leverage financial covenant of 2.5x to maturity. We believe Terex will maintain sufficient headroom of at least 15% under these covenants. In September 2012, Terex used a portion of its cash balances to redeem $300 million of senior notes due 2016. The company's nearest remaining maturity is its $172.5 million senior subordinated convertible notes due 2015, and it redeemed about 25% of outstanding principal in the third quarter of 2012. We expect the primary uses of cash in the next couple of years to be capital expenditures (more than $100 million in 2013) and working capital builds. Sources include FFO, good availability under the company's revolver, and existing cash balances. Recovery analysis We rate Terex's senior secured debt 'BB' with a recovery rating of '2', indicating our expectation that lenders would receive substantial (70%-90%) recovery in the event of a payment default. We rate Terex's senior unsecured notes 'B+' with a recovery rating of '5', indicating our expectation for modest (10%-30%) recovery for noteholders. We rate Terex's subordinated notes 'B' with a recovery rating of '6', indicating negligible (0-10%) recovery prospects for noteholders. Outlook The outlook is stable. We believe credit measures are likely to meet our expectations for the rating within about one year. We expect a sizable tax payment--the company disclosed about $124 million through the third quarter of 2012 related to the sale of Bucyrus in 2010--to limit improvement in FFO this year, keeping FFO to total debt at about 10%. Still, we expect FFO to total debt of about 20% and adjusted debt to EBITDA of less than 4x by the end of 2013. We could lower the ratings if additional debt were likely to result in FFO to total adjusted debt less than 15% in 2013 and excess cash balances were not significant. We could raise the ratings if the company generates adjusted FFO to total debt of 20% and we expect further, sustained improvement that would result in meaningfully positive free cash flow generation of $200 million or more annually, on average, for the next few years. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Our Rating Process, April 15, 2008 Ratings List Ratings Affirmed Terex Corp. Corporate Credit Rating BB-/Stable/-- Ratings Lowered To From Terex Corp. Senior unsecured B+ BB- Recovery Rating 5 4 New Ratings Terex Corp. US$ sr unsecd nts due 2021 B+ Recovery Rating 5 Terex International Financial Serivces Co. Euro sr unsecd nts due 2021 B+ Recovery Rating 5 Temporary telephone contact numbers: Dan Picciotto (646-648-0811). 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.
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