June 11 - Overview -- Private-equity sponsor Leonard Green & Partners is acquiring U.S.-based storage tank manufacturer Roto Holding Corp. for about $830 million. -- We are assigning our 'B' corporate credit rating to Roto Holding Corp.'s subsidiary, Roto Acquisition Corp. (Roto). We are also assigning our 'B' issue rating to Roto's proposed $405 million senior secured credit facility. -- The stable outlook reflects our expectation that Roto will continue to benefit from good demand from agricultural end markets and use free cash flow to reduce debt. Rating Action On June 11, 2012, Standard & Poor's Ratings Services assigned its 'B' corporate credit rating to St. Bonifacius, Minn.-based Roto Acquisition Corp. The outlook is stable. At the same time, we assigned our 'B' issue rating (the same as the corporate credit rating) to the company's proposed $405 million senior secured credit facility. The recovery rating is '3', indicating our expectation of meaningful (50% to 70%) recovery in a payment default scenario. The facility includes a $50 million revolver, which will be undrawn at close, and a $355 million first-lien term loan. Proceeds from the term loan and $195 million in proposed senior unsecured notes (unrated) will be used to fund the acquisition. Rationale The ratings reflect our assessment of Roto's business risk profile as "weak," characterized by limited scale and scope, geographic concentration, and a leading market position in the niche liquid and dry material storage tank industry. We expect the company to continue to generate modest but consistent free cash flow, which should enable it to reduce leverage--defined as total debt (adjusted for operating leases and other debt-like obligations) to EBITDA--to less than 6x by the first half of 2013. Our forecast assumes: -- Strong demand from agricultural end markets continues in 2012 and 2013, resulting in double digit revenue growth each year; -- The EBITDA margin remains at or above 30%, consistent with the past three years; -- Modest capital expenditures of about 2% of revenues; -- The company uses free cash flow to reduce debt and make small acquisitions over the next few years. Roto is an entity formed for the purpose of private-equity sponsor Leonard Green & Partners' acquisition of Tank Holding Corp. Tank was formed in 2008 upon the consolidation of the two market leaders, Snyder Industries Inc. and Norwesco Inc., in the somewhat competitive market for polyethylene and steel storage tanks. Roto serves cyclical end markets including the agriculture, industrial, chemical, and waste and water sectors. During the recent recession, revenues declined about 27%. Geographic diversity is limited, with only 10% of revenues generated outside of the U.S. With recognized brand names, the company has some pricing power but is still somewhat exposed to swings in raw material prices. In 2008, when the price of polyethylene resin spiked, operating margin (before depreciation and amortization) declined to about 24% from 26.5% in 2007. The company subsequently benefited as the cost of resin declined in 2009 and it was able to maintain pricing. More recently, synergies from the combined companies of Norwesco and Snyder have supported a good operating margin of about 30%, and we expect Roto to maintain this level of profitability, on average, over the course of future raw material price swings. Roto's financial risk profile is "highly leveraged." Pro forma for the transaction, debt to EBITDA as of April 30, 2012, was about 6.6x and funds from operations (FFO) to debt was roughly 5%. For the rating, we expect debt to EBITDA of 5x-6x and FFO to debt of about 10%. We expect leverage to decrease to about 6x by the end of 2012. Liquidity We believe Roto has adequate sources of liquidity to cover its needs in the next year, even if EBITDA unexpectedly declined. Our assessment of Roto's liquidity profile incorporates the following expectations and assumptions: -- We expect the company's sources of liquidity, including cash, to exceed its uses by 1.2x or more over the next 12 months; -- We expect net sources to remain positive, even if EBITDA declines more than 15%; and -- We believe the company could absorb low-probability, high-impact shocks. Roto will have full availability under its proposed $50 million revolver, which is likely to be subject to a springing leverage covenant when the company draws more than 15%. We expect the company's capital expenditures to revert to about 2% of revenues after recent expenditures to improve productivity at acquired companies. Debt maturities are manageable until the revolver matures in 2017, the $355 million term loan in 2018, and $195 million in senior unsecured notes in 2022. Recovery analysis For the complete recovery analysis, please see the recovery report on Roto Holding Corp. to be published immediately after this report on RatingsDirect. Outlook The outlook is stable. Increasing demand for fertilizers and other liquids stored in Roto's tanks and the company's good operating margins through the recent recession support the ratings. We could lower the ratings if debt to EBITDA appears likely to exceed 7x and remain elevated for a significant time (for instance, if Roto were unable to pass on increasing resin prices causing margins to decline to about 28%). We could raise the ratings if the company reduces leverage to less than 5x, for instance by using free cash flow to reduce debt or increasing EBITDA margin to about 35%, and we expect leverage to remain near this level. Related Criteria And Research -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List New Ratings Roto Acquisition Corp. Corporate credit rating B/Stable/-- Senior secured $50 mil. revolver due 2018 B Recovery rating 3 $355 mil. term loan due 2019 B Recovery rating 3 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 column.
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