June 11, 2012 / 8:15 PM / 6 years ago

TEXT-S&P rates Roto Acquisition corp credit 'B'

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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