TEXT - S&P cuts Piaggio &C. SpA rating to 'BB-'
(The following statement was released by the rating agency) Overview -- The Italian manufacturer of scooters, motorcycles, and light transportation vehicles, Piaggio &C. SpA, has announced a decrease in revenues and an increase in reported debt for the first nine months of 2012. -- We think that credit metrics for Piaggio will not be commensurate with a 'BB' rating at year-end 2012 and that they are unlikely to recover in 2013. -- We are lowering the long-term corporate credit rating on Piaggio to 'BB-' from 'BB'. -- The stable outlook reflects our expectation over the next year that Piaggio should be able to achieve credit metrics that we view as line with the 'BB-' rating level, namely a ratio of funds from operations to debt in the range of 15%-20%. Rating Action On Nov. 30, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Italian manufacturer of scooters, motorcycles, and light transportation vehicles Piaggio &C. SpA to 'BB-' from 'BB'. The outlook is stable. We also lowered our issue rating on Piaggio's senior unsecured notes to 'BB-' from 'BB'. The '3' recovery rating on these notes is unchanged, indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. Rationale The downgrade primarily reflects our opinion that at year-end 2012, Piaggio's credit metrics will be weaker than we previously expected and not commensurate with our guidelines for a 'BB' rating. In addition, the weak economic conditions in Europe, particularly in Southern Europe, that we foresee next year are unlikely to support a recovery in these metrics in 2013. The rating reflects our view of Piaggio's "fair" business risk and "aggressive" financial risk profiles, according to our criteria. We assess Piaggio's management and governace as fair. In our base-case scenario for the coming quarters, we anticipate continued weak demand for two-wheel vehicles in Italy and Western Europe. We assume that Piaggio's unit sales will fall by about 15% in Western Europe in 2012. This decrease will be only partially offset by the increase in scooter sales in Vietnam that has so far fallen short of our expectation. Furthermore, the weakness of commercial vehicle sales in India in the first half of 2012 will likely not be counterbalanced by the recovery in this segment in the final quarter of the year. Piaggio group sales this year will be about 7% lower than in 2011, by our estimate. We expect the group will maintain its reported EBITDA margin at close to the 2011 level, in the area of 13%, owing to the positive impact of the product in Europe and to the group's severe actions to control costs. Under this scenario, we expect Piaggio to exceed our adjusted debt-to-EBITDA ratio guideline of 3.5x with a ratio of about 4x at year-end 2012. In light of the persisting economic weakness in Europe and the possibility of new volatility in the demand for scooters and commercial vehicles in countries outside Europe, we believe that that this ratio will not improve in 2013. For next year, we expect low-single-digit revenue growth, with EBITDA margin likely to stay between 12% and 13%. At end-September 2012, Piaggio reported a EUR35 million increase in reported net debt. This is linked to high investments that we expect will total about EUR130 million for the full year, the acquisition of a small supplier, and increased shareholder remuneration and share buybacks. We believe that Piaggio is unlikely to offset this increase in debt by yearend. For 2013, we assume that Piaggio will continue to invest in new products and in its expansion in Asia and India. However, we believe that the company has the possibility to downsize investments if its expectations for growth in demand are not met outside Europe. By contrast, we believe the company has very limited flexibility in dividend distribution, which will probably stay above EUR25 million. Year to date, Piaggio has paid EUR30 million in dividends and had repurchased shares amounting to about EUR6 million at end-September. Liquidity We assess Piaggio's liquidity as "adequate," according to our criteria. We expect the ratio of liquidity sources to uses will stay above 1.2x in 2012 and 2013. -- On Sept. 30, 2012, the group had EUR122.0 million in cash and about EUR85 million in financial debt maturing in one year. -- It also had EUR70 million in committed available credit lines maturing in 2015 and EUR20 million of committed revolving credit facilities (RCF) maturing in November 2013. -- The existing bank facilities have some covenants, but the headroom under them was significant, in our view, on June 30, 2012. We see Piaggio's ability to generate free operating cash flow as a support for the rating, but the group's financial policy largely offsets this support. Recovery analysis The issue rating on Piaggio's EUR150 million senior unsecured notes due in 2016 is 'BB-', in line with the corporate credit rating on the company. The recovery rating on these notes is unchanged at '3', indicating our expectation of meaningful (50%-70%) recovery in the event of a payment default. Our issue and recovery ratings on the senior unsecured notes are supported by Piaggio's significant valuation and the primarily unsecured nature of the company's credit facilities. The ratings are constrained by the absence of any tangible security to the benefit of the notes, the notes' relatively weak protection in the documentation against the raising of new secured debt or a securitization facility, and Piaggio's likely insolvency regime, Italy, which we consider to be a less creditor-friendly jurisdiction. Our analysis includes the refinancing started in December 2011 and ended in May 2012, involving new revolving credit facilities of EUR200 million from a pool of international banks, EUR20 million from Banco Popolare, and EUR40 million from Banca Monte dei Paschi di Siena SpA (MPS), the proceeds of which were used to refinance the RCF and part of the debt amortizing in 2012. In line with our criteria, in order to determine recoveries, we simulate a hypothetical default scenario. Our simulated default scenario contemplates a default in 2015, assuming deterioration in the macroeconomic environment and operating underperformance by Piaggio, all resulting in refinancing risk in 2015 when the RCF of EUR200 million is due. In our hypothetical default scenario, we estimate that EBITDA would be about EUR123 million. Given the nature of Piaggio's business we believe that the group would reorganize in the event of a default, rather than liquidate, supporting our going concern valuation. We estimate a stressed enterprise value at the point of hypothetical default of about EUR615 million, implying a stressed EBITDA multiple of 5.0x. After deducting priority liabilities of EUR200 million, mainly comprising enforcement costs, a finance lease, factoring lines, 50% of unfunded pensions, and structurally senior debt at Piaggio's subsidiaries, we arrive at a net stressed enterprise value of about EUR420 million for the pari-passu ranking unsecured debt holders. At default, we assume about EUR570 million of pari-passu ranking unsecured debt to remain outstanding, including six months of prepetition interest. These unsecured debt facilities comprise the EUR150 million, 7% senior unsecured notes due 2016, the $75 million, 6.5% private placement notes due 2021, the RCF which we assume to be fully drawn, and other bank loans. We also assume the RCF maturing before 2015 would be refinanced. This translates into meaningful (50%-70%) recovery for the unsecured noteholders and a recovery rating of '3'. Although the numerical coverage is slightly higher than the 50%-70% range, we cap the recovery rating at '3' due to the unsecured nature of the debt and our view of Italy's relatively creditor-unfriendly insolvency regime. Outlook The stable outlook reflects our expectation over the next year that Piaggio should be able to achieve credit metrics that we view as in line with the 'BB-' rating level, namely funds from operations to debt in the range of 15%-20%. We also factor in continued tough economic conditions in Europe and sales growth in India and Vietnam marginally below the projections that the group included in its three-year business plan presented in December 2011. We could revise the outlook to negative or lower the rating on Piaggio if sales again dropped by about 8% next year, with a contraction in the operating margin, and in turn weakening cash flow generation pushed up debt and resulted in deteriorated credit metrics to below the level we see as consistent with the current ratings. We could assign a positive outlook or raise the rating if the financial risk profile improved through healthy cash flow generation that Piaggio uses to reduce the debt. Sound cash flow generation could stem from increased unit sales and revenues, on the back of a sustained rebound in demand in Europe or strong growth in countries outside Europe. Concurrently, we would anticipate FFO to debt at 25% or higher. Related Criteria And Research -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Debt Recovery For Creditors And The Law Of Insolvency In Italy, May 17, 2007 -- Key Credit Factors: Business And Financial Risks In The Auto Component Suppliers Industry, Jan. 28, 2009 Ratings List Downgraded; Outlook Action Piaggio & C. SpA Corporate Credit Rating BB-/Stable/-- BB/Negative/-- Downgraded To From Piaggio & C. SpA Senior Unsecured BB- BB To From Ratings Affirmed Piaggio & C. SpA Recovery Rating 3 (Caryn Trokie, New York Ratings Unit)
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