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5 years ago
TEXT-S&P revises Brand Energy & Infrastructure outlook to stable
September 26, 2012 / 4:11 PM / 5 years ago

TEXT-S&P revises Brand Energy & Infrastructure outlook to stable

Overview
     -- Kennesaw, Ga.-based Brand Energy & Infrastructure Services plans to 
issue a new $825 million senior secured first-lien credit facility and use the 
proceeds to repay its existing first-lien term loans and partially reduce its 
second-lien term loans.
     -- We expect the company to maintain its low double-digit EBITDA margins 
on slow demand recovery in its end-markets for the remainder of 2012 and into 
2013.
     -- We are affirming our 'B' corporate credit rating and assigning issue 
ratings to the company's proposed debt.
     -- We are revising the outlook to stable from negative given our 
expectation for Brand's leverage to improve to about 6x over the next 12 
months and that the financing will be completed.



Rating Action
On Sept. 26, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
corporate credit rating on Brand Energy & Infrastructure Services and revised 
the outlook to stable from negative.

The proposed $825 million first-lien facilities consist of a $700 million term 
loan facility, a $75 million revolving credit facility, and a $50 million 
fully funded letter-of-credit facility. We assigned our 'B' issue rating and 
'4' recovery rating (indicating our expectation of averagerecovery 
in the event of payment default) to the company's proposed term loan and 
revolving credit facility and assigned our 'BB-' issue rating and '1' recovery 
rating (very high recovery of 90%-100%) to its $50 million letter-of-credit 
facility.

At the same time, we raised our issue rating on Brand's $180 million Canadian 
tranche of the second-lien debt to 'BB-' from 'B+' and revised the recovery 
rating to '1' from '2'. We also affirmed our 'CCC+' issue-level rating on the 
company's $195 million U.S. second-lien term loan with a recovery rating of 
'6', indicating our expectation of negligible (0%-10%) recovery. The Canadian 
and U.S. second-lien debt together make up Brand's $375 million second-lien 
credit facility.

The ratings are subject to a review of final documentation. 

Rationale
The ratings on Brand reflect our view of the company's "highly leveraged" 
financial profile and "weak" business profile. The outlook revision indicates 
our expectation for sustained low double-digit EBITDA margins on slow demand 
recovery in its end-markets, our expectation leverage will fall to about 6x 
over the next 12 months and that its proposed refinancing extends maturities 
on a portion of its debt. Our financial risk assessment reflects Brand's high 
leverage and modest cash flow generation prospects over the next two years, 
and the overall business risk assessment reflects its exposure to volatile 
end-markets and competitive pricing.

We expect Brand to remain one of the largest providers of work access (i.e., 
scaffolding) and multicraft services in North America, with customers 
primarily in the energy sector--in particular, refineries--and, to a lesser 
extent, utilities. Although some of its end markets are cyclical, maintenance 
services (roughly two-thirds of revenues) tend to be more resilient to 
recessions. Contract terms between three and five years (although customers 
can cancel these on a relatively short notice) should continue to provide some 
earnings stability. Brand also has a commercial business, which is more 
project-focused, less recurrent, and accounts for only about 8%-10% of 
revenues. 

After being delayed during the economic downturn, maintenance and plant 
turnaround activity is slowly picking up across Brand's end markets. We expect 
demand for maintenance services in Brand's energy and industrial markets to 
modestly grow, at least in line with U.S. GDP, and for pricing to remain 
competitive. Brand's EBITDA margins have been improving over the past few 
quarters after they weakened as a result of price concessions that the company 
offered in response to competitive pressures. Also, some customers delayed 
maintenance capital expenditures over the past downturn. Given some 
improvement in demand, where possible, Brand has renegotiated some of its 
contracts, which we will continue to monitor with respect to our base-case 
assumptions for its operating performance over the next two years.

Our base case scenario assumptions for Brand include:
     -- Revenue will grow at about a mid-single-digit rate for the remainder 
of 2012 and 2013 mainly as a result of business wins in 2011 in its 
petrochemical end-markets and slow economic recovery driving low growth in its 
refining- and oil sands-related end-markets. 
     -- EBITDA margins will rise at least by about 100 basis points over 2011 
levels to about 10% or more over the next two years (after incorporating 
ongoing pricing pressure), because of overall sales recovery, absent any 
meaningful contract losses or productivity losses from potentially severe 
weather. 
     -- Leverage will improve to about 6x or less over the next two years with 
low, but positive, free cash flow generation prospects over the cycle.

We view Brand's financial risk profile as highly leveraged, given pro forma 
leverage (including our adjustments) of more than 6.5x as of June 30, 2012, 
and our expectation for leverage to remain above 6x for the next 12 months. We 
expect some gradual improvement, although these metrics will likely remain at 
the lower end of our expectations.

For the rating, we expect adjusted debt to EBITDA of about 6x or less and free 
operating cash flow (FOCF) to total debt in the low-single-digit area. The 
company's liquidity position has improved given it has extended its proposed 
revolver maturity to 2017 from February 2013. We expect Brand to maintain 
adequate liquidity and to take steps to extend or resolve its second-lien debt 
maturities over the next 12 months. 

Liquidity
We believe Brand has adequate liquidity. Our assessment of Brand's liquidity 
profile incorporates the following expectations and assumptions:
     -- We expect sources of liquidity, including available cash and funds 
from operations to exceed uses by 1.2x or more over the next 12 months;
     -- We believe net sources would remain positive even if EBITDA declines 
by 15%; and 
     -- The proposed first-lien credit agreement would contain a first-lien 
net leverage covenant if the revolver is more than 50% drawn, which we do not 
expect in our base case. We expect at least over 15% cushion on its first-lien 
net leverage covenant. The second-lien facility contains no financial 
covenants.

Liquidity sources as of June 30, 2012, were adequate to cover near-term uses, 
with roughly $65 million of cash (pro forma) on the balance sheet (including 
$50 million of restricted cash) and an undrawn $75 million revolving credit 
facility (matures 2017) after refinancing. Given the proposed first-lien net 
leverage ratio requirements, Brand's access to its revolver is no longer 
limited to 50% of the $75 million facility, minus outstanding letters of 
credit. 

We also incorporate benefit to cash flow from meaningful interest expense 
savings following the rolloff of $525 million of swaps earlier this year. We 
expect uses of liquidity over the next 12 months to include approximately $30 
million to $40 million in capital expenditures (net of proceeds from used 
equipment) and roughly $20 million to $25 million in working capital.

We believe the proposed refinancing of Brand's first-lien debt, the extension 
of the revolver maturity, and partial repayment of its second-lien debt has 
improved financial flexibility. However, we believe the ultimate timing and 
terms for refinancing of its second-lien debt would be an important factor in 
our assessment of the company's liquidity profile and therefore the ratings on 
the company over the next 12 months.  

Recovery analysis
For the complete recovery analysis, see the recovery report on Brand to be 
published on RatingsDirect after this report. 

Outlook
Our stable outlook reflects our expectation for improved financial flexibility 
given that Brand is extending the maturity on its first-lien debt. Also, over 
the next 12 months we expect Brand to sustain recent improvements in EBITDA 
margins, given its recent ability to mitigate pricing pressures. Leverage 
should improve toward 6x, assuming industry activity picks up to historical 
levels, which is likely because customers can only generally delay maintenance 
work temporarily. 

We could consider a downgrade if the proposed transaction does not close or if 
we believe Brand would not reduce leverage toward 6x or less because of 
renewed pressure on EBITDA margins, leaving it vulnerable to eventual 
refinancing risks. A downgrade also could occur if Brand's liquidity profile 
deteriorates on end-markets that are weaker than we expect for a prolonged 
period, leading to customers delaying maintenance work over the near term, or 
if Brand loses maintenance projects altogether. 

An upgrade is unlikely over the next 12 months given our expectations for 
company's financial risk profile to remain highly leveraged. We believe the 
ultimate timing and terms for refinancing of Brand's second-lien debt, along 
with the increased likelihood that leverage will sustain around 5x or less, 
would be significant factors for any positive rating action on the company 
over the next year.  

Related Criteria And Research
     -- Economic Research: U.S. Economic Forecast: He's Buying A Stairway To 
Heaven, Sept. 21, 2012
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
 


Ratings List
Ratings Affirmed; Outlook To Stable
                                        To                 From
Brand Energy & Infrastructure Services
 Corporate Credit Rating                B/Stable/--        B/Negative/--

Ratings Affirmed

Brand Energy & Infrastructure Services
 Senior Secured Second Lien             CCC+               
   Recovery Rating                      6                  
 Senior Secured First Lien              B                  
   Recovery Rating                      4                  

Upgraded
                                        To                 From
Aluma Systems Inc.
 Senior Secured                         BB-                B+
  Recovery Rating                       1                  2

New Rating

Brand Energy & Infrastructure Services
 Senior Secured
  US$50 mil LoC bank ln due 2018        BB-                
   Recovery Rating                      1                  
  US$700 mil term loan due 2018         B                  
   Recovery Rating                      4                  
  US$75 mil revolver due 2017           B                  
   Recovery Rating                      4                  

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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