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Fitch Assigns Stabilus' Senior Secured Notes Final 'B+' Rating
June 24, 2013 / 3:07 PM / 4 years ago

Fitch Assigns Stabilus' Senior Secured Notes Final 'B+' Rating

(The following statement was released by the rating agency) FRANKFURT/LONDON, June 24 (Fitch) Fitch Ratings has assigned Servus Luxembourg Holding S.C.A.'s EUR 315m five-year senior secured notes a final rating of 'B+'/'RR3'. The proceeds refinance existing senior and mezzanine debt of approximately EUR242m and fund a distribution to shareholder of EUR81.2m as well as a distribution to holders of profit participating instruments of EUR12.1m. The notes benefit from guarantees from major subsidiaries as well as from a guarantee from the parent company (Servus Holdco S.a.r.l. Luxembourg (Stabilus); B/Stable) and are secured by first-priority liens over collateral (while enforcement proceeds are first allocated to super senior ranking debt). Fitch notes that the notes allow for up to 50% of cumulative net income to be paid-out as dividends. Stabilus' 'B' IDR factors in the changed capital structure following the issue of the notes and the establishment of a new EUR25m super senior revolving credit facility (RCF) that matures after four years and nine months. The new super senior RCF of a committed EUR25m plus an optional EUR15m increase ranks ahead of the notes and its utilisation is subject to a covenant test. The resulting total EUR40m prior ranking debt is permanent, as the existing super senior RCF can be replaced within the lifetime of the notes. Additionally, certain hedging liabilities as well as up to EUR7.5m for indemnities related to the previous financing rank ahead of the notes at the level of the super senior RCF. Moreover, the notes' documentation also allows for Stabilus to re-leverage. The parent company may assume further debt provided a fixed-charge cover test of 2.0 is met. Secured debt ranking equal to the notes may be incurred by the issuer of the notes if the consolidated debt/EBITDA ratio is below 3.25x. KEY RATING DRIVERS Favourable Business Profile Approximately 64% of Stabilus' revenues stem from its automotive segment. The second-largest segment is industrials (30% of sales). After-market sales, which typically enjoy higher operating margins, are so far marginal. Stabilus' main product - gas springs (used in all business segments) - has achieved commoditisation status and Stabilus is the market leader with a significant distance to its competitors. This ensures high economies of scale and cash-generating abilities. However, overall product diversification and the relative significance of Stabilus' products - mainly components - for OEMs remains limited. The company has a solid track record of strong relations with its customers and benefits from strong customer diversification both in its automotive and industrial segments. The top three customers account for approximately 26% of revenues, with the 10 largest customers in automotive accounting for approximately 50% of the segment's revenues. Stabilus is also present in the high-growth market of electromechanical opening and closing systems (power rise systems). Profitability in its smallest business division, swivel chairs (6% of revenues), is weak. The division is currently subject to a turnaround programme. Strong Profitability Stabilus enjoys strong profitability compared with its peer group (in particular other automotive suppliers) with an EBITDAR-margin of 16.7% in FY2012. Cash flow generation was also strong with funds from operations (FFO)/sales at 10% and free cash flow (FCF) of 3.3%. Moreover, the company has generated positive FCF since restructuring in 2010. Fitch expects lower but still positive FCF in 2013, with improvements to more than 2% again in 2014. Debt Levels The debt levels and key financial metrics are commensurate for the assigned default rating level. Total adjusted debt/EBTIDAR was 4.4x and FFO adjusted leverage was 5.6x at end-FY2012. At end-FY2013, following refinancing, Fitch expects total adjusted debt/EBITDAR to be around 4.5x, FFO adjusted leverage of 5.1x, while FFO interest coverage ratio is estimated at around 3x on a full year basis. Fitch has not treated any of the profit participating instruments as debt due to their characteristics which are similar to equity, in particular the absence of material independent enforcement rights. Increased Competitive Risk Stabilus has successfully positioned itself as a systems supplier of automated, electromechanical opening and closing systems and therefore moves up the scale in terms of importance for the OEMs. However, in this segment, Stabilus competes with much larger and more diversified suppliers, which are expected to react to the group's ambitious growth plans in this segment. In addition, this segment is likely to have higher R&D and capex requirements. Cyclicality and Fixed Cost Base Stabilus predominantly operates in mature markets, marked by the high volatility and cyclicality of new vehicle sales and industrial products manufacturing (e.g. heavy-weight vehicles). This is particularly relevant as Stabilus' fixed cost base is high and a material adverse change in demand for its products would likely damage its profitability and cash-flow generation severely. RATING SENSITIVITIES: Future developments that could lead to positive rating actions include: - Successful execution of the strategy to further grow the business and at the same time enhance diversification from a product standpoint as well as geographically - FFO adjusted leverage is sustainably below 4x. - FFO interest cover improves to 3.5x or above. Future developments that could lead to negative rating action include: - FFO adjusted leverage going to or above 6x. - FCF margins deteriorating to a level of below 1%. Expected Recovery for Creditors upon Default The senior secured notes' 'B+'/'RR3' rating reflects Fitch's expectation of above average recoveries in the range of 51%-70%. The instrument rating is reflective of Stabilus' elevated FFO adjusted leverage above 5x and takes into account a EUR25m super senior RCF and up to EUR7.5m of indemnities both effectively ranking ahead of the bond. Driving these recovery expectations is an estimated post-restructuring EBITDA approximately 35% below the group's 2012 EBITDA to reflect a hypothetical adverse scenario of depressed sales and compressed margins as a function of high operational leverage and earnings cyclicality. Combined with an estimated going concern multiple of 5x enterprise value/ EBITDA, this results in a more favourable valuation than the agency's alternative estimation of a liquidation scenario. Contact: Principal Analyst Matthias Volkmer Director + 49 69 7680 76252 Supervisory Analyst Karsten Frankfurth Senior Director +49 69 7680 76125 Fitch Deutschland GmbH Taunusanlage 17 Frankfurt Committee Chair Arkadiusz Wicik Senior Director +48 22 338 62 86 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable criteria, 'Corporate Rating Methodology', dated 8 August, 2012, 'Evaluating Corporate Governance' dated 12 December, 2012 and 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' dated 13 November, 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Corporate Rating Methodology here Evaluating Corporate Governance here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here Treatment of Junior Corporate Debt in Europe; European HoldCo PIK and Shareholder Loans here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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