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May 27 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Italy-based building products company Officine Maccaferri S.p.A. (Officine Maccaferri) an expected Long-term Issuer Default Rating (IDR) of 'B(EXP)' and an expected senior unsecured rating of 'B(EXP)'. The Outlook on the Long-term IDR is Stable.
Fitch has also assigned an expected rating of 'B(EXP)'/'RR4(EXP)' to the company's prospective EUR200m 2021 bond. The proceeds of the notes will be used for refinancing existing debt, to acquire the real estate of the company's headquarters, to pay a special dividend to the company's shareholders and for general corporate purposes. The notes are rated at the same level as Officine Maccaferri's IDR as they will constitute direct, unsecured and unconditional obligations of the issuer and some of its guarantor subsidiaries.
The assignment of the final rating for the bond is contingent upon the receipt of final documentation conforming to information already received, and for Officine Maccaferri on the successful issue of the EUR200m bond.
The bonds will be structurally subordinated to existing secured debt at the subsidiary level (although bond documentation limits the total secured debt to EUR65m including the existing factoring facility). In addition only certain subsidiaries (totaling approximately 54% of consolidated revenue, 54% of consolidated EBITDA and 54% of total assets) will provide upstream guarantees to the issuer. Financial covenants are limited to a fixed charge cover ratio of over 2x.
Officine Maccaferri's ratings reflect its small size, a weak albeit improving financial profile, exposure to competitive pressures which restrict its pricing power, and the industry's medium-sized barriers to entry. The ratings also reflect the company's average business risk profile, characterised by its technical expertise, leadership position in a small niche market, and geographic diversity.
The 'B(EXP)' senior unsecured bond rating reflects Fitch's recovery analysis of the company on a going concern basis, using an industry-consistent multiple applied to an appropriately stressed EBITDA level. This results in 50% recoveries and a Recovery Rating of 'RR4' and leads to an equalisation with the IDR.
Weak to Moderate Financial Profile Post-refinancing, Officine Maccaferri's financial profile is best characterised as weak, although it is expected to improve over the medium term. Gross leverage is expected to be over 5x at end-2014, and to remain over 4x to end-2017, assuming no material debt reduction, which may occur if the company chooses to deploy its liquidity reserves towards this purpose. Free cash flow (FCF) is expected to be slightly over 1% of revenue in the coming years, an improvement on the negative FCF generation in the last four years which saw considerable investment in capacity growth, but this is dependent on the company maintaining a conservative dividend policy, reduced capex and stable working capital flows.
Given the flexibility in the cost structure, the company's EBIT margins are also expected to remain stable between 6% and 7% over the coming years (6.6% in 2013), which is in line with the expected ratings. FFO fixed charge cover, which was at 2.5x at end-2013, is expected to approach 3x in the next three years.
Small Geographically Diversified Market Leader
The company is a leader in a small, niche market and provides somewhat unique products. Officine Maccaferri also benefits from geographic diversity, which reduces the risks that come with customer concentration, and from its reliance on the fiscal strength of a limited number of government bodies that are its customers. It is nevertheless a small company operating in a market with medium-sized barriers to entry, and is exposed to competitive pressures of substitute products, which limits its pricing power to a degree.
Officine Maccaferri is well placed to benefit from some favourable long-term key drivers of its business. This includes environmental regulation, global urbanisation, emerging markets development needs, pent-up demand for infrastructure in developed markets following several years of low investment as a consequence of the financial crisis, and the increasing complexity of many new projects which require the kind of expert technical solutions and experience of Officine Maccaferri.
Officine Maccaferri is part of a family-owned and -run conglomerate. While Fitch has not factored in support to other group companies in its ratings, evidence of excessive cash channelling to other group entities may have a negative rating impact. Investors can gain some comfort from certain measures and policies put in place to improve governance, including largely non-recourse debt issuance among its operating entities as well as minimal related-party transactions within the group. Dividend upstreaming from Officine Maccaferri to the parent, S.E.C.I. S.p.A, will also be restricted under the proposed bond issue to 50% of net profits.
Positive: Future developments that could lead to positive rating actions include:
- FFO adjusted leverage below 4x
- FFO fixed charge cover above 3.5x
- FCF above 2% of revenue
- EBIT margin above 7%; all on a sustained basis
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted leverage above 5x
- FFO fixed charge cover below 2.5x
- Negative FCF
- EBIT margin below 5%, all on a sustained basis