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TEXT - S&P cuts Piaggio &C. SpA rating to 'BB-'
November 30, 2012 / 5:11 PM / 5 years ago

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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