Fitch Assigns Final Ratings to Alpha AB Bidco BV.
The final rating on the TLB is in line with the expected rating assigned on 14 September 2018, and follows the receipt of final documents conforming to earlier information.
The IDR of Alpha AB Bidco BV (Ammeraal Beltech and Megadyne SpA combined) reflects Fitch's expectation of stable revenue and profits for the combined group over the rating horizon. The combined entity forms a global manufacturer of conveyer and power transmission belts with little product overlap and pro forma EBITDA of EUR132.5 million for the fiscal year ending 31 December 2017 (FY17). The rating also reflects the high leverage at closing of the transaction in September 2018. Ammeraal's acquisition of Megadyne was financed with a new EUR830 million seven-year senior secured covenant-lite TLB and a euro-equivalent 160 million (USD186 million) eight-year second-lien facility.
KEY RATING DRIVERS
Megadyne Acquisition, Strategic Fit: The combination of Ammeraal and Megadyne brings together a complementary product range of conveyor belts and power transmission belts, a recurring income stream from after-market sales, and above-inflation organic growth prospects. The combined group has a diverse product portfolio, geographic footprint and customer base. Fitch believes that Ammeraal and Megadyne have largely avoided commoditised belt applications where pricing power is weak and, instead, focused on markets where their expertise and experience is acknowledged and pricing power is enhanced.
We also view the execution risk of the merger as moderate. Under Partners Group's ownership, we expect management will focus on targeted synergies of around EUR20 million within 24 months coming from operational efficiencies, which we believe are reasonable.
Supportive Product Demand, Diversification: Industrialisation in many sectors requires more automation, such that growth prospects are positive across various geographies. The enlarged group's end-market exposure is diverse, spanning food manufacturing, logistics (including packaging), industrial processes, household goods and elevators. We expect growth to come from increasing application and installation of belt products to support the rise of automation in industrial processes, and greater precision and efficiency requirements from original equipment manufacturers.
After-market revenue (a large majority of turnover) feeds off the group's initial installation of the equipment with recurring requirements for replacement and upgrading of belts. Ammeraal's and Megadyne's ability to retain customers historically should support earnings resilience over the rating horizon.
Cash Generative Profile: The group has a stable, profitable and cash-generative financial profile. The capex-light nature of the business (which represents less than 5% of sales) and free cash flow (FCF) margin, which Fitch expects to be above 5% of sales over the rating horizon, help to compensate for the high leverage. Profit and cash flow stability is also underpinned by raw materials (such as oil, rubber, and ethanol) representing around 23% of turnover and being largely passed onto customers, as well as the group's ability to flex costs in downturns.
Highly Leveraged Capital Structure: At closing of the transaction in September 2018, the FFO adjusted gross leverage was around 8.5x, a clear constraining factor for the rating. The rating assumes the combined group will maintain a disciplined financial policy, with no dividends, no further transformative M&A, such that we forecast FFO lease-adjusted gross leverage will decrease towards 6.0x by 2022. Any deviation from this deleveraging path, for example because of debt-funded and/or margin-dilutive M&A, may lead to a negative rating action.
The merger of Ammeraal Beltech and Megadyne should allow the combined entities to achieve greater scale and help protect pricing power thanks to synergies and increased market share in the niche belt manufacturing segment. Although the group's direct competitors are larger and more diversified manufacturers, Fitch calculates that their belting segment is smaller or equal to the equivalent production capacities within the combined group. On the belt segment, the combined group faces direct competitors like Forbo, Rexnord Corporation and Gates even though these peers are bigger and more diversified.
The combined group is also much smaller and has far more leverage than US industrial conglomerates, such as Xylem, Inc., The Timken Company and Flowserve Corporation, which are all investment-grade companies.
We believe that the combined group sits well within the 'B' category, relative to Fitch's EMEA portfolio of Industrial & Manufacturing credit opinions. Despite a high initial leverage that is more consistent with a 'B-' rating, Alpha AB Bidco's size, profitability, FCF margin and deleveraging profile support a 'B' rating.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Annual sales growth of 3.5%-4% for Ammeraal Beltech and Megadyne over the next three to four years driven by strong demand, recurring customers with after-market sales, bolt-on acquisitions and potential cross-selling of products to the wider customer base.
- Slightly improving EBITDA margins thanks to margin convergence of less-profitable geographies towards 20% on average for the combined entities. Few comparable peers, where figures are disclosed, reach these margins of above 20%.
- Annual cost synergies of EUR20 million by 2020.
- 3.5% capex as a percentage of sales in line with the historical average.
- Working capital outflow equivalent to 2% of sales.
- EUR15 million cash spent on acquisitions per year, financed by internally generated funds.
- No dividend.
- No additional transformative acquisition.
KEY RECOVERY ASSUMPTIONS
Bespoke Approach: As Alpha AB Bidco's IDR is in the 'B' rating category, Fitch undertakes a bespoke recovery analysis in line with its criteria. Under a going concern restructuring scenario, we have stressed our projected FY19 EBITDA of EUR167 million to derive a post-restructuring EBITDA of EUR125 million.
Fitch has applied a distressed enterprise value (EV) multiple of 5.5x, which reflects a significant discount from the EV multiple paid for Megadyne and the current trading multiple of peers including Forbo, Rexnord and Gates (all ranging from 11x to 13x). Assuming some EUR14 million of local debt with non-guarantor group entities ranks super-senior to the TLB, and assuming the RCF is fully drawn as per our criteria, the recovery rate estimate for the TLB is 60%, which translates into a 'B+'/RR3 rating for that instrument.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
Planned synergies achieved and retained within the group, with commitment to de-leverage such that:
- FFO gross leverage is below 5.0x on a sustained basis.
- EBITDA margin above 20% on a sustained basis.
- FFO fixed-charge cover above 2.5x on a sustained basis.
- FCF above 5% of sales on a sustained basis.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- FFO gross leverage greater than 7.0x on a sustained basis.
- FFO-based fixed-charge cover below 2.0x on a sustained basis.
- EBITDA margin below 15% on a sustained basis.
- Neutral to negative FCF on a sustained basis.
- Debt-funded acquisition activity increasing the risk profile of the group.
Long-Dated Capital Structure: The issuer has raised a EUR830 million seven-year senior secured covenant-lite TLB and euro-equivalent 160 million (USD186 million) eight-year second-lien facility. The TLB has guarantors constituting around 63% of group EBITDA, which is weak compared with market standards. At closing, cash is expected to be EUR45 million (of which jurisdiction-related restricted cash is EUR21 million). Management expects the 6.5-year EUR150 million RCF to be largely undrawn, although it could be used to fund acquisitions. The RCF may also be used to refinance local debt of EUR35 million with various group entities that will exist at closing
FULL LIST OF RATING ACTIONS
Alpha AB Bidco BV
- Long-Term IDR: assigned at 'B'/Stable
- The Expected Senior Loan Long-Term Rating of 'B+(EXP)'/'RR3'/60% is now final and applied to the EUR830 million TLB but withdrawn from the EUR150 million RCF (as this rating is no longer required)
- EUR830 million TLB: assigned at 'B+'/'RR3'/60%
- EUR150 million RCF, rating withdrawn.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Jan 16, 2019|
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