-- Construction and industrial equipment manufacturer Terex Corp. plans
to issue $850 million senior unsecured notes due 2021, and the increased
amount of outstanding unsecured notes after the transaction will reduce
recovery prospects for this class of debtholders.
-- We are assigning our 'B+' issue-level and '5' recovery rating to the
proposed notes and lowering our rating on the company's other existing senior
unsecured notes to 'B+' from 'BB-'.
-- We are affirming our other ratings on the company, including the 'BB-'
corporate credit rating.
-- The stable outlook reflects our expectation for continued improvement
in credit measures in 2013 to levels consistent with the rating.
On Nov. 7, 2012, Standard & Poor's Ratings Services affirmed its 'BB-'
corporate credit rating on Terex Corp. The outlook is stable. We also
lowered our rating on the company's existing senior unsecured notes to 'B+' from
'BB-'. The recovery rating has been revised to '5', indicating our expectation
for modest (10%-30%) recovery in a default scenario, from '4'.
At the same time, we assigned 'B+' issue-level and '5' recovery ratings to the
company's proposed $850 million senior unsecured notes, which are to be issued
through separate U.S. dollar-denominated and euro-denominated offerings. Both
the U.S. dollar and euro issues will be guaranteed by Terex Corp. and certain
wholly owned domestic subsidiaries. The U.S. dollar notes will be issued by
Terex Corp. The issuer of the European notes is Terex International Financial
Services Co., an Irish subsidiary of Terex Corp.
The downgrade of Terex's unsecured notes reflects the increased amount of
outstanding notes after the transaction that reduces recovery prospects for
this class of debtholder. We affirmed our other ratings on the company because
we believe operating performance will continue to improve next year, bringing
credit measures in line with our expectations for the rating. Terex expects to
use proceeds from the issuance to refinance $800 million of subordinated notes
due 2017 and to pay related fees and expenses.
The ratings on the Westport, Conn.-based construction and industrial equipment
manufacturer reflect Standard & Poor's assessment of the company's
"aggressive" financial risk profile and "fair" business risk profile. We
expect that operating performance will continue to improve in 2013 as the
global economy continues its slow recovery. The company should also benefit
from its acquisition of 82% of the shares of Demag Cranes AG (not rated), a
Germany-based supplier of industrial cranes, port technology, and related
services, in August of 2011 for about $1.1 billion. We expect Terex to
generate about $7.5 billion in sales and for its adjusted EBITDA margin in
2012 to be about 9%, benefiting from higher volumes and its 2011
restructuring. Next year, we forecast revenue growth to decelerate to the
mid-single digits but expect continued modest improvements in profitability to
result in 10% or higher adjusted EBITDA margin.
We believe this will support improved credit measures, including adjusted debt
to EBITDA of less than 4x and funds from operations (FFO) to total debt of
about 20%, which would meet our expectations for the rating after several
years of very weak credit measures.
Terex manufactures a broad range of equipment for the construction and
infrastructure industries. The company operates in the highly cyclical and
competitive construction equipment industry, and its profitability can be
volatile. However, we expect it will maintain good positions in some niche
construction-related markets--such as its No. 2 position in the aerial work
platform market. Terex has good geographic diversity. Europe and the U.S. each
account for close to 30% of sales, and about 40% comes from the rest of the
world. Terex also has decent product diversity across its five reporting
We consider Terex's financial risk profile to be aggressive because of its
acquisitive strategy and our expectation for significant swings in cash flow
generation through the operating cycle. Credit measures have recently been
weak for the rating in recent years, but we expect them to meet our
expectations in 2013. At the rating, we expect Terex to maintain FFO to total
debt of 15%-20%, but metrics are likely to be volatile. Decent cash balances
and a manageable maturity profile also support the ratings. Terex has also
increased its credit offering to customers through Terex Financial Services
(TFS). The scale of this operation is modest, with about $142 million in
assets at the end of the third quarter, and we do not anticipate rapid growth
in the near term.
Liquidity is "adequate." Our assessment of the company's liquidity profile
incorporates the following expectations and assumptions:
-- We believe sources of funds will exceed 1.2x uses over the next year.
-- We expect net sources of funds to remain positive even in the event
that EBITDA declines by 15%.
-- We believe the company has generally prudent financial risk management
and sound relationships with banks.
Under its credit facility (closed June 2011 and amended and repriced in
October 2012), the company is subject to a minimum interest coverage covenant
and a maximum senior secured leverage financial covenant of 2.5x to maturity.
We believe Terex will maintain sufficient headroom of at least 15% under these
In September 2012, Terex used a portion of its cash balances to redeem $300
million of senior notes due 2016. The company's nearest remaining maturity is
its $172.5 million senior subordinated convertible notes due 2015, and it
redeemed about 25% of outstanding principal in the third quarter of 2012. We
expect the primary uses of cash in the next couple of years to be capital
expenditures (more than $100 million in 2013) and working capital builds.
Sources include FFO, good availability under the company's revolver, and
existing cash balances.
We rate Terex's senior secured debt 'BB' with a recovery rating of '2',
indicating our expectation that lenders would receive substantial (70%-90%)
recovery in the event of a payment default. We rate Terex's senior unsecured
notes 'B+' with a recovery rating of '5', indicating our expectation for
modest (10%-30%) recovery for noteholders. We rate Terex's subordinated notes
'B' with a recovery rating of '6', indicating negligible (0-10%) recovery
prospects for noteholders.
The outlook is stable. We believe credit measures are likely to meet our
expectations for the rating within about one year. We expect a sizable tax
payment--the company disclosed about $124 million through the third quarter of
2012 related to the sale of Bucyrus in 2010--to limit improvement in FFO this
year, keeping FFO to total debt at about 10%. Still, we expect FFO to total
debt of about 20% and adjusted debt to EBITDA of less than 4x by the end of
We could lower the ratings if additional debt were likely to result in FFO to
total adjusted debt less than 15% in 2013 and excess cash balances were not
significant. We could raise the ratings if the company generates adjusted FFO
to total debt of 20% and we expect further, sustained improvement that would
result in meaningfully positive free cash flow generation of $200 million or
more annually, on average, for the next few years.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Our Rating Process, April 15, 2008
Corporate Credit Rating BB-/Stable/--
Senior unsecured B+ BB-
Recovery Rating 5 4
US$ sr unsecd nts due 2021 B+
Recovery Rating 5
Terex International Financial Serivces Co.
Euro sr unsecd nts due 2021 B+
Recovery Rating 5
Temporary telephone contact numbers: Dan Picciotto (646-648-0811).
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