September 27, 2012 / 8:01 PM / 5 years ago

TEXT-S&P cuts Nexans S.A. rating to 'BB'

(The following statement was released by the rating agency)
    
Overview
     -- The combined effects of French cable maker Nexans' cash-funded 
acquisitions of Amercable and 75% of Shandong Yanggu, and the operational 
issues it faced in first-half 2012 in the High Voltage Transmission segment 
have weakened its credit metrics.
     -- We anticipate that Nexans' credit metrics will fall significantly 
below our threshold for a 'BB+' rating at year-end 2012.
     -- We are lowering our long-term rating on Nexans to 'BB' from 'BB+', 
affirming our 'B' short-term rating, and lowering our issue ratings on the 
group's debt by one notch.
     -- The stable outlook reflects our anticipation that Nexans will 
gradually restore its performance in the Transmission segment and withstand a 
certain degree of economic slowdown.

Rating Action
On Sept. 27, 2012, Standard & Poor's Ratings Services lowered its long-term 
corporate credit rating on France-based cable manufacturer Nexans S.A. to 'BB' 
from 'BB+'. The outlook is stable. 

At the same time, we affirmed our 'B' short-term corporate credit rating on 
Nexans. We also lowered our issue ratings on Nexans' following debt 
instruments to 'BB' from 'BB+':
     -- The senior unsecured EUR350 million 5.75% notes due 2017, 
     -- The EUR212.6 million 4% convertible bonds due 2016, and 
     -- The EUR275 million 2.5% convertible bonds due 2019. 
The recovery rating of '3' on these instruments remains unchanged, indicating 
our expectation of meaningful (50%-70%) recovery in the event of a payment 
default.

Rationale
The downgrade reflects pronounced weakening in Nexans' credit metrics over the 
past 12-18 months, owing to the combined effects of the group's cash funded 
acquisitions of Amercable and a 75% stake in Shandong Yanggu, and the 
operational issues it has faced in the High Voltage Transmission segment.

Operational issues in Nexans' Transmission activity in the first half of this 
year resulted in disruptions in production and dented group operating margins. 
Nexans reported a 150 basis-point contraction in operating margins for the 
first six months of 2012. We expect a gradual recovery in the Transmission 
segment, leading to an improvement in operating margins in the second half of 
the year compared with first-half levels. However, the operational issues will 
likely continue to negatively affect margins during the second half, more so 
than is generally the case, but to a lesser extent than in the first half. We 
also anticipate a deterioration in margins in the Distribution & Installers 
segment in the second half, based on the likely slowdown in the construction 
market, particularly in Europe. We anticipate that Nexans' adjusted EBITDA 
margin will be slightly below 5% for full-year 2012. The production 
disruptions have also negatively affected cash flow, notably working capital, 
by delaying the delivery of contracts. Without the Transmission operations 
disruptions, we estimate Nexans' operating cash flow generation would have 
been about EUR120 million-EUR150 million higher for full-year 2012.

Also weighing on Nexans' credit metrics are its cash-funded acquisitions of 
Amercable in February 2012 and the 75% stake in Shanddong Yanggu, closed in 
August 2012, for a cumulative cash disbursement of EUR340 million. In addition, 
in 2011, the group provisioned EUR200 million related to an antitrust enquiry in
the EU, which we include in our adjusted debt amount. As a result, we estimate 
Nexans' adjusted debt at about EUR1.5 billion at year-end 2012, versus EUR847 
million at the end of 2010.

We anticipate a ratio of Standard & Poor's adjusted FFO to debt of about 15%, 
slightly negative free operating cash flow (FOCF), and a ratio of adjusted 
debt to capital of 44% at year-end 2012. These credit metrics no longer meet 
our guideline for a 'BB+' rating. 

For 2013, we expect a gradual improvement in Nexans' operating performance and 
credit metrics, with an adjusted EBITDA margin wider than 5% and adjusted FFO 
to debt of about 20%, which we consider to be fully commensurate with the 'BB' 
rating. We base our estimates on the assumption that Nexans' recovery plan in 
High Voltage Transmission will be successful and result in a complete 
restoration of operations by the end of 2013. In addition, we believe Nexans 
will be able to withstand an increasingly difficult macroeconomic environment 
if necessary because, in our view, its Power Transmission & Distribution 
activity (which represents close to half of Nexans' revenues) is largely 
immune to macroeconomic cycles. We also anticipate that Nexans will benefit 
from its good diversification, both in terms of geographies and end markets.

The ratings on Nexans continue to reflect our assessments of its business risk 
profile as fair and its financial risk profile as significant, under our 
criteria.

We acknowledge the company's leading positions in competitive segments of the 
cable industry, growing geographic diversification, the increasing weight of 
higher-value-added products in its total sales, as well as Nexans' still 
relatively solid capital structure and liquidity. However, the ratings are 
primarily constrained by Nexans' profitability, with a Standard & 
Poor's-adjusted EBITDA margin of less than 5% expected at year-end 2012, which 
is lower than those of most industry peers. Another rating constraint is the 
cyclicality of some of Nexans' end markets and its exposure to swings in raw 
materials prices, which can have a heavy impact on working capital.

Liquidity
We have revised down our assessment of Nexans' liquidity to "adequate" from 
"strong", under our criteria. This is because Nexans' liquidity cushion has 
decreased since the beginning of the year, through the Amercable and Shandong 
Yanggu acquisitions and the cash burn related to the operational issues in the 
High Voltage Transmission business. Still, Nexans comfortably meets our 
requirements for adequate liquidity.

Relevant aspects of the group's liquidity, based on our criteria, are as 
follows:
     -- Sources of cash are likely to substantially exceed uses for the next 
12 to 24 months, by 1.5x or more. Cash sources include EUR435 million of 
unrestricted cash and cash equivalents on June 30, 2012. Nexans also has 
access to an undrawn EUR540 million revolving credit facility (RCF), which was 
recently refinanced, and now matures in December 2016. We anticipate 
discretionary cash flow to be marginally positive in the coming 12 months.
     -- Cash uses in our base-case scenario include the acquisition of the 75% 
stake in Shangong Yanggu in the second half of 2012 and the payment of a EUR200 
million antitrust fine in 2013.
     -- The RCF includes customary financial covenants, including a 
requirement of a maximum unadjusted net debt-to-EBITDA ratio of 3.0x, pro 
forma for the Amercable acquisition. Headroom under these covenants has 
decreased but was still comfortable as of June 30, 2012. We anticipate that 
this will continue to be the case in the coming quarters.

Recovery analysis
The senior unsecured EUR350 million 5.75% notes due 2017, the EUR212.6 million
4% 
convertible bonds due 2016, and the EUR275 million 2.5% convertible bonds due 
2019, all issued by Nexans, are rated 'BB', in line with the long-term 
corporate credit rating on the company. The issues have a recovery rating of 
'3', indicating our expectation of meaningful (50%-70%) recovery in the event 
of a payment default.

The issue and recovery ratings on the unsecured debt take into account our 
view of limited prior-ranking and pari passu liabilities, the potential for 
cross-jurisdictional insolvency in the event of a default, and the relatively 
high level of committed debt facilities that are designed to accommodate 
nonferrous-metals' price volatility.

In order to determine recoveries, we modeled a default in 2016. At the 
hypothetical point of default, we estimate the stressed enterprise value of 
the company to be about EUR1.1 billion, based mainly on a discounted cash flow 
valuation. The enterprise value available to the creditors reflects a 
potential leakage of value to structurally senior, minority-interest holders 
in operating subsidiaries. We continue to see the fully drawn RCF at default 
ranking pari passu with the unsecured convertible bonds. Assuming that the 
convertible bonds are not converted into equity prior to default, we estimate 
that about EUR1.4 billion of unsecured debt (including prepetition interest) 
will be outstanding at default, leading to recovery prospects in the 50%-70% 
range and resulting in the recovery rating of '3'.

Outlook
The stable outlook reflects our base-case assumption that Nexans will 
gradually restore its operating performance in the High Voltage Transmission 
segment over the next 12-18 months. It also factors in the consolidation of 
the earnings of Amercable and Shandong Yanggu on a full-year basis in 2013. We 
consider that Nexans is well equipped to face a weaker economic environment, 
because of its strong geographical and end-market diversity, and the Power 
Transmission & Distribution business' low sensitivity to macroeconomic cycles. 
This division represents close to half of Nexans' business.

We view an adjusted FFO-to-debt ratio in the 15%-20% range and positive FOCF 
generation over the cycle as commensurate with the current rating. In 
addition, we expect the debt-to-capital ratio to remain below 45% at all times.

Should Nexans fail to restore its operating performance in the Transmission 
segment in the coming 12-18 months, we would likely revise down our assessment 
of the business risk profile and lower the ratings. Also, any markedly 
negative deviation from our forecasts, leading to largely negative FOCF or any 
sizeable debt-funded acquisition in the coming 12-18 months, would likely lead 
us to downgrade Nexans.

We could consider a positive rating action on Nexans if it restores its 
operating performance in the Transmission segment, resulting in significant 
operating margin improvement. We might also upgrade Nexans if we see a 
reduction in Nexans' adjusted debt, through FOCF generation over the coming 
18-24 months, leading to an improvement in credit metrics to a level solidly 
commensurate with our assessment of the financial risk profile as significant, 
and with adjusted FFO to debt in the 20%-30% range. 

Related Criteria And Research
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012 
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 
     -- General: 2008 Corporate Critera: Ratios And Adjustments, Apr. 15, 2008 
     -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' 
Speculative-Grade Debt, Aug. 10, 2009

Ratings List
Downgraded; Ratings Affirmed
                                        To                 From
Nexans S.A.
 Corporate Credit Rating                BB/Stable/B        BB+/Stable/B

 Senior Unsecured                       BB                 BB+
  Recovery Rating                       3                  3

 (Caryn Trokie, New York Ratings Unit)

0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below