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April 30 (The following statement was released by the rating agency)
Fitch Ratings has placed Servus Holdco S.a. r.l.'s 'B' Issuer Default Rating (IDR) and Servus Luxembourg Holding S.C.A.'s EUR315m senior secured notes, rated 'B+,' on Rating Watch Positive (RWP). The rating action follows Stabilus' announced plans for an IPO.
Following discussions with Stabilus' management, Fitch notes that the IPO is likely to materialise in the near future and will result in a reduction of debt of around EUR63m. Fitch forecasts that funds from operations (FFO) adjusted leverage will decline to a level below 4x by end of September 2014 (FY14), albeit with interim debt fluctuations relating to short-term debt. The debt reduction is expected to reduce interest expenses by approximately EUR5m per annum, resulting in a FFO/interest cover ratio above 3x (2015 forecast: 3.8x).
At the same time, public listing will further diversify the funding sources available to Stabilus and enhance the company's financial flexibility.
With its last rating action as of 24 March 2014, Fitch had stated that further implementation of the growth strategy and increasing geographic diversification, FFO adjusted leverage sustainably below 4x and FFO/interest cover above 3.5x may result in an upgrade. While it is still too early to evaluate the strategy implementation, two of the upgrade triggers are expected to be achieved shortly after the debt reduction takes place, making an upgrade possible. The remaining senior secured notes will also benefit from improved recoveries following debt reduction. Current performance of Stabilus is in line with Fitch's expectation and free cash flow in 1HFY14 improved to EUR14m from a negative EUR6.1m in 1HFY13.
KEY RATING DRIVERS
Deleveraging Accelerates via IPO
Fitch had previously expected the FFO adjusted leverage of Stabilus to remain near 4.5x due to cash requirements related to the execution of the expansionary strategy. The IPO and the envisaged debt reduction of EUR63m will reduce leverage to a level below 4x, while enhancing financial flexibility. Discretionary cash-flow would increase due to lower interest payments.
Balanced, Resilient Profile
Stabilus is the market leader in its main and commoditised product - gas springs - with a significantly greater market share than its nearest competitors. As a result, the company enjoys considerable economies of scale and sound cash generation. The ratings are further supported by Stabilus' broad mix of mature and growth products in both automotive and industrial applications, with limited customer concentration. This helps provide a buffer against the high demand volatility and cyclicality that characterise the mature markets Stabilus operates in. Given Stabilus' high fixed-cost base a sustained decline in demand would hurt profitability and cash flow generation.
Competitive Threats Remain
Stabilus has successfully positioned itself as a favoured supplier of automated, electro-mechanical opening and closing systems, and as a result, has become increasingly important to OEMs' supply chains. However, in this segment, Stabilus competes with larger and more diversified suppliers, which Fitch expects will react to the company's ambitious growth plans. In addition, this segment is likely to see higher R&D and capex requirements, which will hold back the company's deleveraging efforts.
Cash Flow Fluctuation
Stabilus has generated positive free cash flow (FCF) margins over the past four years and during 1HFY14. However, capacity expansion efforts are likely to remain a strong cash drain, although this would be mitigated by reduced interest expenses following its IPO and debt repayment. As with most industrial producers, Stabilus experiences seasonal working capital volatility; outflows are heaviest during the early parts of the year.
Sufficient Financial Flexibility
Fitch views Stabilus' liquidity position as adequate with sufficient financial flexibility. Stabilus had EUR35m of cash on balance sheet at end-FY1H14. In addition, the group continues to have access to a EUR25m revolving credit facility (RCF). Moreover, Stabilus has access to a factoring programme amounting to EUR35m, of which EUR20m has been utilised.
Strong Credit Recovery
The 'B+' notes are rated 'RR3', reflecting above-average recoveries. Recovery rates for the remaining creditors are expected to improve as a result of debt reduction. The notching between the IDR and the instrument rating may widen further by one notch as a result.
The ratings are likely to be upgraded by one notch if the proposed IPO proceeds as planned, resulting in debt reduction of EUR63m.
Conversely, the ratings are likely to be affirmed with a Stable Outlook if the planned IPO fails to materialise.