TEXT-S&P puts Alliance Laundry 'B+' rating on watch negative
Overview -- U.S.-based Alliance Laundry Systems is planning to refinance existing debt and fund a proposed shareholder distribution with $560 million of new senior secured credit facilities. -- We are placing our 'B+' corporate credit rating on Alliance Laundry on CreditWatch with negative implications. -- At the same time, we are assigning our 'B' issue-level rating to the company's proposed $435 million first-lien senior secured credit facilities, and our 'CCC+' issue-level rating to the company's proposed $125 million second-lien term loan. -- We intend to resolve the CreditWatch listing and lower the corporate credit rating by one notch to 'B' upon completion of the proposed refinancing and distribution to shareholders. Rating Action On Nov. 27, 2012, Standard & Poor's Ratings Services placed its 'B+' corporate credit rating on Ripon, Wis.-based Alliance Laundry Systems LLC on CreditWatch with negative implications, meaning the ratings could either be lowered or affirmed following the completion of our review. At the same time, we assigned our 'B' issue-level rating to the company's proposed $435 million first-lien senior secured credit facilities, comprising a five-year $75 million revolving credit facility and a six-year $360 million first-lien term loan. The recovery rating on this debt is '3', indicating our expectation for meaningful (50% to 70%) recovery for lenders in the event of a payment default. At the same time, we assigned our 'CCC+' issue-level rating to the company's proposed seven-year $125 million second-lien term loan. The recovery rating on this loan is '6', indicating our expectation for negligible (0% to 10%) recovery for lenders in the event of a payment default. We expect proceeds from the new term loans to be used to repay existing debt and fund a $232 million shareholder distribution. Following the completion of this refinancing transaction, we anticipate lowering the corporate credit rating by one notch to 'B' as a result of the higher debt levels and weaker credit measures Alliance Laundry will incur. Accordingly, the new issue-level ratings are not on CreditWatch but are dependent on completion of the company's proposed refinancing transaction, and are subject to a review of final documentation. The ratings on the company's existing $345 million senior secured credit facilities due 2017 remain unchanged and are not on CreditWatch, and will be withdrawn upon closing of the new senior secured credit facilities. Rationale Alliance Laundry's CreditWatch placement reflects our belief that credit measures will meaningfully deteriorate and be below our expectations for the existing ratings as a result of significantly higher debt levels following the completion of the proposed recapitalization transaction. The company plans to use proceeds from this transaction along with cash from the balance sheet to repay its existing $254 million term loan due 2017 and to fund a $232 million shareholder distribution. As a result of this transaction, we expect adjusted leverage will increase to about 5.7x and the ratio of funds from operations (FFO) to total debt will decline to about 9%, from about 3.4x and 23%, respectively, for the 12 months ended Sept. 30, 2012. Standard & Poor's ratings on Alliance Laundry reflect our view that following the company's proposed recapitalization transaction the company will have a "highly leveraged" financial risk profile and "weak" business risk profile. Key credit factors in our business risk assessment are the company's narrow product focus, small scale, and customer concentration, yet strong market position in the U.S. commercial laundry equipment segment. The financial risk assessment reflects our expectation that credit measures will weaken and remain consistent with indicative ratios for a highly leveraged financial risk profile, including adjusted leverage above 5x and FFO to total debt of less than 12%. Alliance Laundry is a manufacturer of a full line of self-contained commercial laundry equipment, primarily serving laundromats, multiunit housing laundries, and on-premise laundries, with about 70% of its sales in the U.S. and Canada. Recovery analysis For the complete recovery analysis see Standard & Poor's recovery report on Alliance Laundry, to be published following this report on RatingsDirect. CreditWatch We intend to resolve the CreditWatch listing when Alliance Laundry completes the proposed refinancing transaction and shareholder distribution. At that time we expect to lower the corporate credit rating to 'B' from 'B+' based upon terms of the currently proposed dividend recapitalization. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Use of CreditWatch and Outlooks, Sept. 14, 2009 -- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 -- Key Credit Factors: Business And Financial Risks In The Branded Consumer Products Industry, Sept. 10, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Rating Placed On CreditWatch To From Alliance Laundry Systems LLC Corporate credit rating B+/Watch Neg/-- B+/Stable/-- Ratings Assigned Alliance Laundry Systems LLC Senior secured Five-year $75 mil. revolver B Recovery rating 3 Six-year $360 mil. term loan B Recovery rating 3 Seven-year $125 mil. term loan CCC+ Recovery rating 6 Ratings Unchanged Alliance Laundry Systems LLC Senior secured BB- Recovery rating 2 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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