TEXT-S&P affirms RCCL 'BB-' rtg; places 'BB' issue rtg on watch neg

Tue Nov 20, 2012 9:24am EST

RCCL and Ruetgers are likely to have limited capital expenditure plans and positive free cash flows over the next two years, in our opinion. This will support RCCL's liquidity and ability to manage its financial flexibility during the weaker stages of the economic cycles. But we do not expect the company to use the cash to reduce debt at least over the next two years. This is because RCCL has notes with bullet maturities and no amortizing debt. Nevertheless, the company has demonstrated discipline in its use of its free cash flows and willingness to deleverage following a similar large-size acquisition in 2007.

The acquisition should expand RCCL's geographic diversification and give the company a significant presence in the coal tar business, and therefore diversity from CPC. RCCL's exposure to the aluminum industry as an end consumer will reduce to about 50% of revenue after the acquisition, from more than 90% now. We believe integration risk is limited given the modest synergies and continuation of Ruetgers' existing management. RCCL and Ruetgers share a fair amount of similarities, and both have strong market shares in their respective businesses.

We forecast that the combined entity's proforma EBITDA margin will be lower for the year ending Dec. 31, 2012, due to Ruetgers' lower margin. We do not expect RCCL's financial risk profile to substantially deteriorate because of the decline in margin. But a material fall in our projected consolidated EBITDA margin could stretch RCCL's cash flow metrics beyond our threshold for the rating.

We placed the rating on RCCL's notes on CreditWatch because the additional debt that the company plans to borrow for funding the acquisition is likely to be pari passu to the existing debt. We believe this could lower the recovery rating of '2' on the notes by one or two notches, resulting in the issue rating to be lowered by a notch. We will resolve the CreditWatch within the next two to three weeks when the final amount and structure of fund raising is available to us.

Liquidity

RCCL's liquidity is "adequate," as defined in our criteria. We expect the company's liquidity sources to exceed its liquidity needs by about 1.2x or more over the next two years. Our liquidity assessment incorporates the following factors and assumptions:

-- Liquidity sources include our expectation of FFO of US$175 million in 2013 and US$180 million in 2014. The company is likely to have a cash balance of about US$90 million after the acquisition is completed at the end of 2012.

-- We expect capital spending of about US$80 million in 2013 and US$70 million in 2014.

-- Dividend payables are likely to be about US$36 million in 2013 and US$12 million in 2014.

-- We anticipate that the company's net sources of liquidity will remain positive even if its EBITDA declines by 20%.

RCCL is also likely to maintain sufficient sources of liquidity in the form of revolver credit facilities at its U.S. and European operations. We believe RCCL and its parent CPC Holdings USA LLC (not rated) will maintain a sufficient cushion in their financial covenants. RCCL's ability to raise funds over the past three to five years supports our view of the company's satisfactory credit market standing.

Outlook

The stable outlook on RCCL reflects our expectation that RCCL will maintain its operating and financial performances over the next 18-24 months. We anticipate that the company's capacity utilization will stay above 70% and that its margin will remain fairly stable over this period.

We may lower the rating if RCCL's operating performance is weaker than we expected or its financial performance deteriorates due to lower revenue growth and profitability. A downward rating trigger is a ratio of adjusted debt to EBITDA of more than 4.0x on a sustained basis. We could also lower the rating if RCCL faces difficulties in integrating Ruetgers.

We are unlikely to raise the rating in the next year. We may, however, raise the rating if: (1) RCCL's competitive position strengthens with improved size, a better market position, and increased diversity in its suppliers and end consumers; and (2) the company's financial risk profile improves such that its FFO-to-debt ratio is more than 25% and its debt-to-EBITDA ratio is less than 2.5x, on a sustainable basis.

Related Criteria And Research

-- Rain CII Carbon Rating And Outlook Unchanged On Agreement To Acquire Ruetgers N.V., Oct. 24, 2012

-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 19, 2012

-- 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

Rain CII Carbon LLC

Corporate Credit Rating BB-/Stable/--

CreditWatch/Outlook Action

To From

Rain CII Carbon LLC

Senior Secured BB/Watch Neg BB

Recovery Rating 2 2