-- Valcourt, Que.-based recreational products manufacturer Bombardier
Recreational Products Inc. (BRP) plans to issue new bank debt to refinance
existing debt, pay a special C$375 million dividend, and for general corporate
-- We are assigning our 'B+' issue-level rating and '4' recovery rating
to the company's proposed US$1.05 billion senior secured term loan B due 2019.
-- We are also affirming our ratings on BRP, including our 'B+' long-term
corporate credit rating on the company.
-- The stable outlook reflects Standard & Poor's opinion that BRP will
sustain improvement in its operating performance and that credit ratios will
remain in line with our expectations in the next year.
On Jan. 22, 2013, Standard & Poor's Ratings Services affirmed its ratings on
Valcourt, Que.-based recreational products manufacturer Bombardier
Recreational Products Inc. (BRP), including its 'B+' long-term corporate
credit rating on the company. The outlook is stable.
In addition, we assigned our 'B+' issue-level rating and '4' recovery rating
to BRP's proposed US$1.05 billion senior secured term loan B due 2019. The '4'
recovery rating indicates our expectation of average (30%-50%) recovery in the
event of default. We understand that proceeds of the new term loan will be
used to refinance existing term debt, pay a special C$375 million dividend,
and for general corporate purposes.
The ratings on BRP reflect Standard & Poor's view of the company's "weak"
business risk profile and "aggressive" financial risk profile (as our criteria
define the terms). We base our business risk assessment on the volatile demand
for the company's products due to their discretionary nature, which led to
sharp declines in revenue and profit in the last recession, and intense
competition. These factors are partially offset by what we consider BRP's
solid market position in the recreational products industry, improved
operating performance, and well-established dealer network. Our financial risk
assessment is based on the company's aggressive financial policy and weak
credit protection measures.
BRP manufactures motorized recreational products including snowmobiles under
the Ski-Doo and Lynx brand names, watercraft under the Sea-Doo name, power
sport engines under the Rotax name, all-terrain vehicles (ATV), side-by-side
vehicles and roadsters under the Can-Am name, and outboard engines under the
Evinrude name. The company's revenues are geographically diversified, with key
markets in the U.S., Canada, and Europe.
Consumer spending for "big ticket" discretionary items, such as BRP's
snowmobiles, personal watercraft, and ATVs, declined considerably in 2008 and
2009, but began improving in 2010. Growth has continued since then, with
reported revenue and gross profit both up 14%, in the nine months ended Oct.
31, 2012, compared with the same period in 2011, largely because of increased
volume, favorable product mix, higher pricing, and lower sales incentive
costs, partially offset by higher production costs and unfavorable foreign
In our base case scenario for fiscal 2014, Standard & Poor's expects:
-- BRP's good operating performance to continue this year, albeit with
growth in revenue and gross profit likely to be at a slower pace than in
fiscal 2013, including high single-digit percent revenue growth;
-- Cost of goods sold to decline as a percent of revenue, leading to
improvement in the gross margin; and
-- The company will continue to generate positive free cash flow.
Credit protection measures (adjusted for operating leases, pension liability,
and accounts receivable securitization) continued to improve because of higher
EBITDA, with adjusted debt to EBITDA of 2.7x for the 12 months ended Oct. 31,
2012, which is down from 3.2x for the same period in 2011. Pro forma for the
proposed sizable dividend payment and resulting additional debt, we expect
adjusted debt to EBITDA to rise to about 3.8x, which remains in line with our
guidance for the corporate credit rating and outlook.
We believe BRP will have adequate liquidity in the next 12 months, with
sources exceeding uses by more than 1.2x. We expect that net sources would be
positive, even with a 15% drop in EBITDA. Our view is based on the following
information and assumptions:
-- The company's sources of liquidity are: cash, availability under the
C$350 million asset-backed lending facility due March 2016, and free cash
flow. We believe BRP will generate sufficient cash flow this year to support
-- The proposed term loan is expected to amortize by 1% annually. The
proposed credit agreement includes an excess cash flow sweep that begins in
2014, which could result in expected higher-than-scheduled amortization of the
-- We believe that the company will maintain at least a 15% EBITDA
cushion on its minimum fixed charge coverage ratio of 1.1x. The covenant only
applies when excess availability (as defined in the credit agreement) on the
revolver is less than C$100 million for seven consecutive days.
-- We expect BRP to have sound relationships with its banks and a
generally satisfactory standing in credit markets.
Standard & Poor's understands that the company's liquidity position can
fluctuate significantly from quarter to quarter because of the seasonal nature
of revenues and cash flows.
Standard & Poor's rates BRP's senior secured revolving credit facility 'BB'
(two notches above the corporate credit rating on the company), with a '1'
recovery rating, indicating our expectation of very high (90%-100%) recovery
in a default scenario.
We also rate the company's senior secured term debt 'B+' (the same as the
corporate credit rating on BRP), with a recovery rating of '4', indicating our
expectation of average (30%-50%) recovery in the event of a default.
The stable outlook reflects Standard & Poor's opinion that BRP will sustain
improvement in its operating performance and that credit ratios will be in
line with our expectations in the medium term, including adjusted debt to
EBITDA in the 3x-4x range. We could lower the ratings if the company's
financial flexibility weakens because of poor operating performance or
additional sizable dividends, resulting in adjusted debt to EBITDA above 5x.
Although we recognize the company's good credit metrics for the ratings and
higher margin point to potentially improving creditworthiness, the ratings on
BRP remain constrained at current levels owing to its ownership structure and
future financial policy considerations.
Related Criteria And Research
-- Criteria Guidelines For Recovery Ratings On Global Industrials
Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- Methodology and Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Bombardier Recreational Products Inc.
Ratings Affirmed/Recovery Ratings Unchanged
Corporate credit rating B+/Stable/--
Senior secured revolver BB
Recovery rating 1
Senior secured term debt B+
Recovery rating 4
US$1.05 bil. sr secured term debt due 2019 B+
Recovery rating 4
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