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
-- 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.
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.
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
-- 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.
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
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.
For the complete recovery analysis, please see the recovery report on Roto
Holding Corp. to be published immediately after this report on RatingsDirect.
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
Roto Acquisition Corp.
Corporate credit rating B/Stable/--
$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