Dutch Belting Producer AI Alabama Midco B.V. (Ammeraal Beltech) #B# Rating Put On CreditWatch Negative On Planned Sale

Stocks and Financial Services Press Releases Tuesday July 3, 2018 17:57
STOCKHOLM--3 Jul--S&P Global Ratings

STOCKHOLM (S&P Global Ratings) July 3, 2018--S&P Global Ratings today placed its 'B' long-term issuer credit rating on Dutch belting producer AI Alabama Midco B.V. (Ammeraal Beltech) on CreditWatch with negative implications.

At the same time, we placed our 'B' issue ratings on the group's senior secured debt on CreditWatch negative. The recovery rating remains at '3', indicating our expectation of recovery prospects in the 50%-70% range (rounded estimate: 55%) in the event of a default.

We also placed our 'CCC+' issue rating on the secured subordinated debt on CreditWatch negative, with the recovery rating remaining at '6' (negligible)

The CreditWatch placement follows the announcement that the group's financial sponsor, Advent, has entered into exclusive negotiations to sell Ammeraal Beltech to Partners Group. The transaction details, including purchase price, refinancing plans, and any changes in capital structure are still unknown. We believe, however, that the change of ownership and the following refinancing could lead to increased leverage and further acquisitions, which the new sponsor appears to be supportive of. We therefore see a risk of higher debt and pressure on AI Alabama's credit ratios. Although we notice that profitability improved over the last year, with the EBITDA margin at 16.2% in 2017, up from 13.1% in 2016, in line with our expectations, there is still limited headroom for increased leverage under the rating. We believe leverage could reach levels that are no longer commensurate with the current rating. AI Alabama's funds from operations (FFO) cash interest coverage of 2.4x at year-end 2017 is already relatively weak for the rating.

We view Ammeraal Beltech's business risk profile as constrained by the group's limited size and scope, which result in inherently greater vulnerability to external changes compared with larger and more diversified capital goods companies, in our view. We think that the fragmented nature of the global light-weight belt market poses challenges to Ammeraal Beltech's competitive position. With a share of about 10%, the group does not have a dominant position in this niche market, and strong competition could lead to weaker bargaining power and pronounced pricing pressure. The group's product offering has relatively limited technological content, leading to lower barriers to market entry than we see for some other rated peers in the capital goods industry.

However, we believe that these factors are partly mitigated by the group's broad end-market and customer diversity. The large proportion of recurring replacement sales and fairly high share of revenues from stable end markets, such as food, provide some stability, in our opinion. We also view as positive Ammeraal Beltech's good relationships with customers as a result of its direct-selling strategy and international manufacturing and distribution footprint. The group has some exposure to raw material prices, which could affect its year-on-year profitability. However, we understand the group has historically been able to pass these costs on to its customers.

The acquisition is subject to customary closing conditions.

We will resolve the CreditWatch once the acquisition of Ammeraal Beltech closes, which we expect will happen in the third quarter of 2018. By then, we would expect to have enough information to determine the extent to which the ownership change would affect the company's capital structure, financial policy, and business plan, and ascertain its impact on the rating.

We could lower the ratings if the transaction results in FFO cash interest coverage staying below 2.5x. We also expect the company will continue generating positive free cash flow and maintain an adequate liquidity position for the current rating.


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