-- Schmolz + Bickenbach issued a profit warning saying it will post lower
revenue and income for the second half of 2012 than it had previously expected.
-- Based on the profit warning and continuing weakness of the European
economy we will reevaluate our base-case expectations for the company for 2012
-- We are placing our 'B' long-term rating on the company on CreditWatch
negative, reflecting the possibility of a one-notch downgrade over the next
-- We will resolve the CreditWatch after Schmolz + Bickenbach publishes
third quarter results and we have assessed the covenant compliance risks and
the risk of limited free operating cash flow and leverage exceeding 6x in 2013.
On Nov. 12, 2012, Standard & Poor's Ratings Services placed on CreditWatch
with negative implications its 'B' long-term corporate credit rating on
Switzerland-headquartered specialty long steel producer Schmolz + Bickenbach.
At the same time, we placed our issue rating on the company's EUR258 million
bond on CreditWatch negative.
The CreditWatch placement reflects the continuing decline in 2012 of the
European automotive and machinery industries, which represent 60% of Schmolz +
Bickenbach's revenue. We expect car sales in Europe to fall by 8% in 2012,
with production likely to slow significantly in the fourth quarter of the
year, which will substantially reduce demand for Schmolz + Bickenbach's
specialty long steel.
Because of the sharper decline in steel demand and the company's high
operating leverage, highlighted by its profit warning, we might revise our
2012 EBITDA forecast down from EUR200 million, and our 2013 expectation. This
would increase the risk of a breach of the company's maintenance financial
covenants in 2013. Current covenant thresholds include a 4.0x
net-debt-to-EBITDA ratio and a 3.0x net-interest-coverage ratio at the end of
We also see a risk that Schmolz + Bickenbach's leverage will be above our
previous expectation of 6x in 2012 and 2013, given its lower EBITDA. The
weaker market environment will also constrain free-operating cash flow (FOCF)
generation, although weaker funds from operations (FFO) may be partly offset
by working capital inflow.
We view the absence of a permanent management team for the company in an
increasingly negative light, given the liquidity pressure that could appear as
a result of a breach of covenants, and the difficult market environment. We
understand though that the recruitment process is ongoing, and remains a key
priority for the company.
On the positive side, we view the absence of large debt maturities in the next
couple of years as positive for the rating. We also expect significant working
capital inflow in the second half of the year to support neutral or even
positive discretionary cash flow generation and restrain debt increase.
We continue to assess Schmolz + Bickenbach's liquidity as "less than
adequate," according to our criteria.
The key risk remains tight headroom under the maintenance covenants in the
EUR600 million syndicated loan, of which EUR365 million was drawn on June 30,
2012, and the ABS facility, EUR280 million of which was outstanding, which will
likely be breached under our base case in the third and fourth quarters of
2012. We assume that Schmolz + Bickenbach's core banks will remain supportive
and waive these covenants. Covenant headroom aside, we estimate that the ratio
of sources to uses will be comfortably above 1.2x for the next two years.
Key sources of liquidity for the 12 months to July 1, 2013, include:
-- FFO that should cover most of EUR100 million in capital expenditure
(capex). FOCF at the end of the year will likely be supported by working
capital inflows that we expect to see in the second half of 2012.
-- About EUR250 million of availability under committed long-term credit
lines, of which EUR235 million are under the EUR600 syndicated loan that matures
in April 2015.
Potential uses of liquidity over the next 12 months include moderate debt
maturities of about EUR30 million. The company does not have substantial debt
maturing before 2015. Although it reports drawings under the company's ABS
facility as short-term debt (EUR280 million at the end of June), we consider
such advances to be long-term funding, given that the asset-backed commercial
paper program will mature in April 2015 and is backed by a committed bank line
with the same amount and maturity as the program itself.
The issue rating on Schmolz + Bickenbach's EUR258 million senior secured high
yield notes due in 2019 is 'B', in line with the corporate credit rating. The
recovery rating on the high yield notes is '4', indicating our expectation of
average (30%-50%, at the low end of the range) recovery in the event of a
payment default. The high yield notes are issued by a 100% owned
special-purpose vehicle, Schmolz + Bickenbach LUXCO S.A. (not rated), and were
used to refinance existing debt.
The recovery rating of '4' is underpinned by the company's fair valuation; the
notes' strong guarantee package provided by entities accounting for over 80%
of the group's assets, sales, and EBITDA; and the creditor-friendly Swiss and
German jurisdictions. The rating is constrained by their junior position to
the EUR300 million asset-backed commercial paper (ABCP) program, EUR100 million
KfW IPEX-Bank GmbH loans, and various bilateral lines held at nonguarantor
subsidiaries. The recovery rating is also constrained by the notes' weak
security package, comprised mostly of intangible assets.
To calculate recoveries, we simulate a default scenario. Under our
hypothetical payment default scenario, we value Schmolz + Bickenbach on a
going-concern basis. Given the cyclicality of the company's business and its
high operating leverage, we believe that a default would most likely occur in
2014, because of falling revenues resulting from a deteriorated operating
environment, which, combined with the company's significant debt, would lead
to a payment default.
At our hypothetical point of default, EBITDA would have declined to about EUR155
million and we estimate a stressed enterprise value of approximately EUR780
million. After deducting enforcement costs and priority claims, comprised
mainly of pension deficit claims and operating leases, residual available
value would amount to about EUR509 million. At our simulated point of default,
claims under the priority ranking debt would likely amount to about EUR346
million, including six-months prepetition interest. This would leave about
EUR163 million residual value available for noteholders and equally ranking
debt, composed of a EUR600 million syndicated facility and a $48 million Kfw
Ipex U.S. loan, which results in recovery prospects at the low end of the
30%-50% range, corresponding to a recovery rating of '4'.
We intend to resolve the CreditWatch negative placement within the next
several weeks after we have analyzed the company's third quarter financial
results, expected to be published on Nov. 16. We will focus on covenant
compliance, free operating cash flow, and liquidity.
We will also talk to management about the current order book, cost cutting
program, financial policy, and plans for appointing the permanent management
In our analysis we will focus on whether the company will be able to sustain
leverage at or below 6x in 2012-2013, and generate positive FOCF on and manage
its covenant compliance risk. A breach of covenants, if not waived by banks in
advance, would likely lead to a downgrade.
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
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Key Credit Factors: Methodology And Assumptions On Risks In The Metals
Industry, June 22, 2009
Ratings Affirmed; CreditWatch/Outlook Action
Schmolz + Bickenbach AG
Corporate Credit Rating B/Watch Neg/-- B/Stable/--
Schmolz + Bickenbach LUXCO S.A.
Senior Secured* B /Watch Neg B
Recovery Rating 4 3
*Guaranteed by Schmolz + Bickenbach AG.
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
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