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.