BRIEF-Moody's says assigns Aa2 to $850m NYC GO bonds, Fiscal 2017 Series B
* Moody's assigns Aa2 to $850m NYC GO bonds, Fiscal 2017 Series B; Outlook stable Source text: (http://bit.ly/2gKbRjg)
Overview -- Ferro's earnings have deteriorated in recent quarters due to weak results in its electronic materials segment and continued weakness in Europe. -- We are revising our outlook on Ferro to negative from stable. At the same time, we are affirming our ratings, including the 'B+' corporate credit rating, on the company. -- The negative outlook reflects the potential for ratings to move lower in the near term if operating results do not strengthen from subdued 2012 levels. Rating Action On Nov. 9, 2012, Standard & Poor's Ratings Services revised its outlook on Ferro Corp. to negative from stable. At the same time, we affirmed all our ratings, including the 'B+' corporate credit rating, on the company. Rationale The outlook revision follows the company's report of weak third quarter operating results and reflects our expectation that earnings will remain challenged over the near term. We have modified our initial expectation that earnings in the second half of 2012 would be in line with first half levels, and now believe that they will decline moderately and remain weak into 2013. The reduction in EBITDA reflects continued weakness in Europe (which represents roughly one-third of the company's revenues), and subdued demand in the electronic materials segment, particularly for the company's conductive pastes and powders used in solar panels. Given the continued economic uncertainty and reduced earnings expectations, we now believe that over the near term the key ratio of funds from operations (FFO)-to-total adjusted debt will remain modestly below the 15% that we consider appropriate for the current rating. Key underpinnings at the rating are the expectation that earnings will gradually improve in 2013 as Ferro undertakes additional cost cutting actions, and that the company will be able to maintain adequate liquidity, including sufficient cushion under financial covenants. In October, Ferro announced that it was exploring strategic options for its solar paste business, given the continued weakness and reduced outlook in this segment. We believe that if the company is able to divest this negative EBITDA segment, then the cushion under tight financial covenants would increase and help reduce some of the volatility inherent in the company's operating results moving forward. The ratings on Ohio-based Ferro Corp. reflect our assessment of the company's business risk profile as "weak" and financial risk profile as "aggressive." With annual sales of $1.8 billion, the company produces a variety of performance materials and chemicals for use primarily in the electronics, construction, appliances, automotive, and household furnishings end markets. Ferro operates in six business segments: electronic materials, color and glass performance materials (which include high-quality glazes, enamels, pigments, and dinnerware decoration colors), performance coatings (which include tile coatings and porcelain enamel for appliances and cookware), polymer additives, specialty plastics, and pharmaceuticals. Ferro remains vulnerable to cost fluctuations for its raw materials and has significant exposure to the residential and commercial construction and electronics end markets. Many of the company's products are discretionary purchases, which renders their demand highly sensitive to extended cyclical downturns. In addition, profitability in some business segments (such as polymer additives, which makes up more than 15% of revenues) is suffering because of commodity-like and highly competitive markets. Partially offsetting these weaknesses are the company's leading market positions in some of its segments, a diverse portfolio of performance materials and chemicals, geographic and customer diversification, and an improved cost structure. Its top 10 customers account for about 20% of sales, and it generates more than 50% of revenues outside of the U.S. (although a significant portion of that is derived from the weak European market). Over the past year and a half, the company has been affected by a reduced amount of paste now being used in solar cells (thrifting). In addition, the solar industry has felt the effects of reductions in government subsidies for solar use in parts of Europe, and increased solar panel competition, which led to production overcapacities, excess inventories of solar panels, and rapid price declines. Additionally, tariffs imposed on Chinese solar manufacturers add further uncertainty to demand. At its peak, solar represented a sizeable portion of the electronic materials segment EBITDA and had significantly higher margins than the other segments. The company's overall EBITDA margins have meaningfully deteriorated in large part due to the solar decline; the last-12-month EBITDA margins were 5.9% as of Sept. 30, 2012, down from 12.1% for the same period ended September 2011. Debt reduction in 2009 and 2010 (in part with proceeds from a 2009 equity issuance), the recovery of cash collateral relating to the company's precious metal leases, and the resulting significant reduction in interest expense all contributed to Ferro's improved financial risk profile when compared with 2009. However, as a result of the meaningful drop in EBITDA over the past year, credit metrics have weakened significantly. The key ratio of FFO-to-total adjusted debt (adjusted for capitalized operating leases, and underfunded pension and other postretirement obligations) was 14% as of Sept. 30, 2012, compared with 30% at the end of 2011. We believe management will remain prudent in regards to capital spending plans and acquisition activity, thereby maintaining a financial policy that supports the ratings. Liquidity We view Ferro's liquidity as "adequate." As of Sept. 30, 2012, the company had $25 million in cash and about $335 million available under its $350 million revolving credit facility maturing in August 2015. The company also has a $50 million 364-day receivables securitization facility expiring in May 2013. Ferro uses precious metals in the production of some of its products, primarily silver for electronic materials products. It has $335 million in collateral free lease lines with various financial institutions and did not have any cash on deposit as collateral as of Sept. 30, 2012. However, at certain difficult times in the past Ferro has been required to post cash collateral related to these leases, and this has meaningfully reduced the company's liquidity. Financial institutions can change the amount of cash collateral that is required from the company when the leases come up for renewal, and we continue to view this as a meaningful risk factor if the company's financial profile deteriorates. If the company is successful in exiting the solar segment, then its precious metals requirements would moderately decline. We base our liquidity assessment on the following factors and expectations: -- Sources of cash will exceed 1.2x of cash usage during the next 12 to 18 months; -- Sources will remain positive even in the event of a 20% EBITDA decline; -- Ferro would likely be able to absorb low-probability shocks based on available liquidity. We believe the company's flexibility to lower capital spending or sell assets should supplement liquidity; and -- The company has generally prudent financial risk management. Debt maturities are limited for the next several years, with the next upcoming maturity consisting of the remaining $34 million of convertible senior notes due Aug. 15, 2013. We expect that the company will repay these notes mainly through revolver borrowings. In June 2012, the company temporarily amended its financial covenants to provide additional flexibility. Financial covenants now include a maximum leverage ratio of 4.25x for the fourth quarter of 2012, which steps down to 3.5x thereafter, as well as a maximum capital expenditure and minimum interest coverage covenant. The minimum interest coverage covenant is 2.75x in the fourth quarter of 2012, and 3.0x thereafter. Ferro eliminated the minimum fixed-charge coverage ratio, which was problematic, as it had deducted capital expenditures from EBITDA in the calculation. Our base case assumes the company will be able to maintain compliance with modest cushions, although a moderate improvement in 2013 earnings is needed to remain in compliance given the step downs. We expect that management will be proactive in seeking covenant relief should compliance with covenants become an issue over the near term. Recovery analysis Our issue-level rating on the company's $250 million senior unsecured notes is 'B-' (two notches below the 'B+' corporate credit rating), and the recovery rating is '6', indicating our expectation of negligible (0% to 10%) recovery in the event of a payment default. Our issue-level rating on the $34 million senior convertible notes is 'B-' (two notches below the corporate credit rating), and the recovery rating is '6', indicating our expectation of negligible (0% to 10%) recovery in the event of a payment default. For the complete recovery analysis, see our recovery report on Ferro Corp., ""here =7330512&rev_id=4&sid=998532&sind=A&"," published on May 17, 2012, on RatingsDirect. Outlook The outlook is negative. Our base case assumes that earnings will improve modestly in 2013, albeit from very weak levels, as the company continues its ongoing cost cutting initiatives and could benefit from a potential divestiture of the negative EBITDA solar paste segment. However, we could lower the ratings in the near term if earnings remain at, or deteriorate from, subdued 2012 levels, due to continued weakness in Europe or challenging industry conditions. Based on our downside scenario, we could lower the ratings if revenues decline by 10%, and EBITDA margins remain at current levels. In such a scenario, FFO-to-total adjusted debt would decrease to below 12%. We could also lower the ratings if free cash flow turns negative, EBITDA cushions under the covenants decline to about 10%, or if the financial institutions that Ferro leases its precious metals from, begin to require cash collateral, thus reducing liquidity. We could consider an outlook revision to stable if the macroeconomic outlook strengthens, operating results stabilize, and we gain confidence that EBITDA will moderately improve from weak 2012 levels. Specifically, we could consider an outlook revision if EBITDA margins improve by 150 basis points or more from expected 2012 levels, coupled with a 5% increase in revenues. In such a scenario, we expect that FFO-to-total adjusted debt would consistently exceed 15%. The company's end-market concentration in construction and electronics, which are cyclical and have discretionary demand characteristics, could limit the potential for an upgrade if the company does not take strategic actions to diversify and strengthen its portfolio. Related Criteria And Research -- Key Credit Factors: Criteria For Rating Companies In The Global Commodity Chemicals Industry, Sept. 19, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Ferro Corp. Corporate Credit Rating B+/Negative B+/Stable Ratings Affirmed Ferro Corp. Senior Unsecured B- Recovery rating 6
* Moody's assigns Aa2 to $850m NYC GO bonds, Fiscal 2017 Series B; Outlook stable Source text: (http://bit.ly/2gKbRjg)
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