TEXT-S&P affirms Sequa Corp's 'B' CCR
Overview -- Sequa recently paid down $195 million of its debt with a portion of the proceeds from the sale of its auto unit and plans to refinance the remainder with a new credit facility and notes. -- We are affirming our 'B' corporate credit rating on the company. -- At the same time, we are assigning our 'B' issue rating and '3' recovery rating to the proposed secured credit facility, and '6' issue rating and 'CCC+' recovery rating to the senior unsecured notes. -- The stable outlook reflects our expectation that strength in commercial aerospace, acquisition contributions, and debt reduction using excess free cash flow should lead to gradually improving credit protection measures over the next 12 months. Rating Action On Dec. 7, 2012, Standard & Poor's Ratings Services affirmed its 'B' corporate credit rating on Tampa, Fla.-based Sequa Corp. The outlook is stable. At the same time, we are assigning our 'B' issue rating and '3' recovery rating to the proposed $1.5 billion senior secured credit facility, which consists of a $200 million revolver and a $1.3 billion term loan. The '3' recovery rating indicates our expectation of substantial (50%-70%) recovery in the event of payment default. We also assigned our 'CCC+' issue rating and '6' recovery rating to the proposed $400 million of senior unsecured notes. The '6' recovery rating indicates our expectation of negligible (0%-10%) recovery. Rationale Our ratings on Sequa reflect our expectations that its currently weak credit protection measures will improve gradually over the next year because of increasing earnings and debt reduction. The growth in earnings is due to continued strength in the commercial aerospace market, cost reductions and efficiency initiatives, and the contributions from a recent acquisition. We expect debt to EBITDA to decline to 5.5x-6x in 2013 and funds from operations (FFO) to debt to increase to more than 10%. As a privately owned company, Sequa does not publicly disclose its financial results. We assess the company's financial risk profile as "highly leveraged" based on the company's high debt leverage and very aggressive financial policy. We view the company's business risk profile as "fair," reflecting its major positions in cyclical and competitive niche markets. We assess liquidity as "adequate" and management and governance "fair" under our criteria. On Nov. 15, 2012, Sequa sold its Automotive segment, consisting of ARC Automotive and Casco, for $320 million and used $195 million of the net proceeds to pay down bank debt. The Automotive segment represented 20% of 2011 sales and 17% of adjusted segment EBITDA. The divestiture reduces Sequa's product and end-market diversity somewhat, but the auto supplier business is more cyclical and has greater pricing pressures than the aerospace market. Margins in the Automotive segment, while respectable, had declined in recent years as a result of lower demand following the 2008-2009 recession. Additionally, the business would have required additional capital expenditures to increase capacity and introduce new products, funds that the company can now use to reduce debt. Following the sale of the automotive business, Sequa is now composed of two business segments: Chromalloy Gas Turbine LLC (68% of revenues from continuing operations) and Precoat Metals (32%). Chromalloy primarily supports the airline industry as a leading independent supplier in the repair, manufacture, and coating of blades, vanes, and other components of gas turbine engines, particularly those for commercial aircraft. Good technological capabilities, a low-cost structure, several strategic partnerships and initiatives, and long-term customer relationships enhance Chromalloy's competitive position. However, the unit competes with original equipment manufacturers (OEMs) that focus on increasing market share and have greater financial resources than Chromalloy. Improvements in commercial aerospace are expected to continue through 2013, while military sales are anticipated to be flat to down because of continuing uncertainty and federal budget pressures. Precoat Metals applies protective and decorative coatings for steel and aluminum coils used primarily in the building products industry (industrial and commercial construction). The building products segment represents about 60% of Precoat's business and primarily serves the nonresidential construction market. Precoat also serves customers in heating, ventilation, and air conditioning (HVAC); windows and doors; appliance; transportation; container; and others. Precoat has good niche positions in the markets it serves. On Oct. 21, 2011, Sequa acquired Roll Coater Inc., one of its primary competitors in the coating business. The acquisition increased Sequa's scale in coil coating and created cost synergies through a combination of facility rationalization, elimination of redundant overhead, and supply chain efficiencies. The metal coating business will likely only see modest growth because of the sluggish recovery in nonresidential construction. Liquidity We expect Sequa's liquidity to remain adequate pro forma for the proposed acquisition. We expect sources of liquidity to exceed uses by at least 1.2x over the next 12 months--the minimum level for an adequate designation. We also expect sources to exceed uses, even if EBITDA declines by 15%. Liquidity consists of cash on hand, an undrawn $200 million revolving credit facility, a $75 million accounts receivables facility, and modest internal cash generation. We expect capital expenditures and working capital requirements to remain moderate (historically, capital expenditures have ranged between 2% and 4% of revenues). The proposed refinancing extends the nearest major maturity until 2017, with only $13 million each year due until then. The only financial covenant is in the revolver and limits first-lien leverage, but only if more than 25% of the revolver (excluding letters of credit of up to $35 million) is drawn. Recovery analysis Please see the recovery report to be published on RatingsDirect. Outlook The outlook is stable. Revenues and earnings should see some growth in 2013 because of strength in commercial aerospace, cost reduction efforts, and the contribution from an acquisition. We expect higher earnings and debt reduction using excess free cash flow will lead to improving, albeit still weak, credit protection measures over the next 12 months. However, we are unlikely to raise the rating unless increased cash flow and debt reduction results in debt to EBITDA below 5x and we believe the company's operational prospects and management's financial policy will enable leverage to stay below this level. We could lower the ratings if the commercial aerospace market weakens, or debt-financed dividends or acquisitions result in debt to EBITDA above 7x. Related Criteria And Research -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Standard & Poor's Standardizes Liquidity Descriptors for Global Corporate Issuers, July 2, 2010 -- Key Credit Factors: Methodology and Assumptions On Risks In The Aerospace And Defense Industries, June 24, 2009 Ratings List Ratings Affirmed Sequa Corp. Corporate Credit Rating B/Stable/-- New Rating Sequa Corp. Senior Secured $1.3 bil term ln due 2016 B Recovery Rating 3 $200 mil revolver bank ln due 2016 B Recovery Rating 3 Senior Unsecured $400 mil sr unsecd nts due 2017 CCC+ Recovery Rating 6 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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