Producer Of Flexible Foam Products Armacell Affirmed At #B#; Armacell Holdco Rated #B#; Outlook Stable

Stocks and Financial Services Press Releases Friday August 11, 2017 17:30
LONDON--11 Aug--S&P Global Ratings

LONDON (S&P Global Ratings) Aug. 11, 2017--S&P Global Ratings today assigned its 'B' long-term corporate credit rating to Armacell Holdco Luxembourg S.a.r.l. (Armacell Holdco), producer of flexible foam insulation products. The outlook is stable.

We also affirmed our 'B' long-term corporate credit rating Armacell Bidco Luxembourg S.a.r.l. (Armacell). The outlook is stable.

At the same time, we affirmed our 'B' issue ratings on Armacell's senior secured debt, including its first-lien €100 million revolving credit facility (RCF), its €482 million first-lien term loan, and its €140 million first-lien debt. The '4' recovery rating on these instruments remains unchanged, indicating our expectation of recovery prospects of about 35% in the event of a payment default.

Lastly, we withdrew our 'B' long-term corporate credit rating on Armacell International S.A.

The affirmation reflects our view that the group should be able to strengthen its credit metrics over the next couple of years, after a peak in debt toEBITDA following debt-financed bolt-on acquisitions in 2016 and 2017.

We estimate that Armacell's adjusted debt to EBITDA was about 7.5x (pro forma the acquisitions) at year-end 2016, but we think it will reduce to about 6.5x by the end of 2017 and decrease further to 5.5x-6.0x in 2018, which we view as commensurate with the 'B' rating. The decline should occur as the company unlocks synergies in the newly integrated group, continues to grow in its global market, and repays some of its first-lien debt. The repricing of debt and lower interest costs in the first quarter of 2017 will support stronger cash flows and better EBITDA interest coverage ratios, in our opinion. We also foresee improvement in the operating cash flow-to-debt ratio to about 10% in 2018. We see such credit metrics in 2017-2018 as commensurate with the 'B' rating.

The ratings on Armacell continue to reflect our view of its relatively limited scale and scope of operations compared with global building materials producing peers and by its exposure to the cyclical construction industry, which accounts for more than 50% of total revenues. These risks are partly mitigated by the group's leading positions in the niche market of engineered foams, with strong market shares above 30% in its key regions of operation.

Armacell also benefits from the geographic diversity of its business, with a balanced presence and market-leading positions in Europe, the Middle East, and Africa (EMEA), the Americas, and Asia-Pacific. Its relatively asset-light business model and flexible cost base help it support stable profitability.

The stable outlook reflects our view that, over the next 12 months, Armacell's profitability will continue to gradually improve on the back of above-market-average growth in most regions, synergies unlocked after recent acquisitions, and a continued focus on cost savings. At the same time, we think that the group will reduce its currently high debt to EBITDA to about 6.5x by the end of 2017.

We could lower our rating on Armacell over the next 12 months if we saw material margin erosion due to weakening markets in Europe and Asia-Pacific.

We could also consider a downgrade if large debt-funded acquisitions or distributions to shareholders led to leverage metrics substantially deviating from our base-case scenario, such that we no longer anticipated that debt to EBITDA would decrease to about 6.5x in 2017-2018.

In our view, the potential for an upgrade is currently limited, given the group's highly leveraged capital structure and aggressive financial policy, owing to its private equity ownership. Strong recurring free cash flow and adjusted debt to EBITDA improving to below 5.0x, on a consistent basis, could be positive for the rating over the long run.


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