Research Update: Netherlands-Based BDR Thermea Assigned 'BB-' Rating On Completed Merger; Outlook Stable; Rating On Baxi Withdrawn
|Publication date: 20-Nov-2009 10:20:43 EST|
- Baxi Group and De Dietrich Remeha Group have merged to form Netherlands-based heating products manufacturer BDR Thermea Group.
- We are assigning our 'BB-' long-term corporate credit rating to BDR Thermea.
- We are withdrawing our 'CC' long-term corporate credit rating on Baxi Holdings.
- The stable outlook reflects our belief that BDR's credit metrics will improve in line with our base-case scenario.
On Nov. 20, 2009, Standard & Poor's Ratings Services assigned its 'BB-' long-term corporate credit rating to Netherlands-based heating products manufacturer BDR Thermea Group B.V. (BDR). The outlook is stable. At the same time, the 'CC' long-term corporate credit rating on Baxi Holdings Ltd. (Baxi) was withdrawn. In addition, the subordinated debt rating on the ?100 million second-lien mezzanine notes issued by Baxi's finance subsidiary Heating Finance PLC, and guaranteed by BDR and its other subsidiaries, was raised to 'B' from 'C'. The recovery rating on the notes remains unchanged at '6', indicating our expectation of negligible recovery (0%-10%) in the event of a payment default.
BDR, the third-largest European heating product manufacturer, was created from the merger of De Dietrich Remeha Group (DDR) and Baxi Group. The rating on BDR reflects our view of the group's weak business risk profile, characterized by good profitability, and a strong, well-diversified position in the European heating products market, which we view as mature, seasonal, moderately cyclical, and highly competitive. It also reflects BDR's significant financial risk profile, with high absolute debt levels. This is balanced by strong cash generating ability, adequate liquidity, and a credit-supportive financial policy. BDR is 60% owned by the SAR Foundation, previously the 100% owner of DDR, and 40% owned by Baxi's previous shareholders through a new company that is majority owned by funds advised by the private equity firm BC Partners. We anticipate that Baxi's previous shareholders will likely sell their 40% stake in the medium term, and that the SAR Foundation will strengthen its position as BDR's long-term majority shareholder. We understand that BDR will achieve about ?1.7 billion in sales to rank third in the European heating products market, after the two leading German players Bosch Termotechnology, which is part of Robert Bosch GmbH (AA-/Negative/A-1+), and Vaillant Group (not rated). We believe that BDR will benefit from sound geographic diversification, and that this will allow cost savings in procurement and product development, while offering good cross-selling opportunities. Nevertheless, we believe that the economic climate in which BDR operates will remain tough in the remainder of 2009 and also in 2010. BDR's operations will remain focused on Europe, where the company will likely enjoy leading market positions in its key markets, particularly in the U.K., The Netherlands, Spain, and France. On a pro forma basis, we consider BDR to be more profitable than its larger competitors, with historic pro forma EBITDA margins above 13%. Nevertheless, we believe that BDR will have to manage the integration effectively, and deliver synergies to avoid a more material dilution of margins, including increasing the less-profitable Baxi operations. We consider DDR's experience in successfully managing large acquisitions in the past to be a supportive factor here. After consolidating Baxi's debt, BDR will initially have a high absolute debt level of more than ?550 million, even if we do not see the pro forma debt/EBITDA leverage of 2.5x as aggressive for the rating level. Meanwhile, we view BDR's cash generation ability as strong. We also understand that the company's financial policy is focused on reducing debt levels, in line with DDR's and the SAR Foundation's financial objectives. In our base-case financial scenario, we assume that the ratio of BDR's FFO to debt is about 20% in 2009 and estimate that this ratio will improve to above 30% in 2010. We also estimate the ratio of debt to EBITDA at about 2.5x at the end of 2009, decreasing to about 2.0x the end of 2010. This scenario assumes only modest top-line revenue growth in the medium term, and an improvement in margins on moderate synergy cost savings. Furthermore, we do not assume any dividend payments. We believe that any improvement in BDR's financial credit metrics in the medium term will depend on the company's trading performance and the departure of Baxi's previous shareholders from the BDR shareholding. We believe that the potential future purchase by the SAR Foundation of BC Partners' stake will likely be funded to a significant extent by debt raised at BDR. We do not know the details of this future transaction, but we understand from BDR that it will not take place in the short term. Furthermore, we anticipate that, as a result of this transaction, leverage is unlikely to deviate significantly from its level at the end of 2009.
BDR's liquidity is adequate for the rating, in our view. Short-term to medium-term debt maturities are adequately covered by available cash, committed back-up facilities, and anticipated cash generation. We understand that there are material debt maturities in 2011 and 2012, when Baxi's B and C term loans are due. Currently, we understand that BDR's liquidity position is supported by:
- Estimated cash of about ?100 million at the end of 2009. Most of this will come from a ?95 million equity injection on completion of the transaction. About ?70 million of the latter sum should be available to fund transaction costs and future debt repayments.
- Access to two revolving credit facilities (RCFs)--one of ?75 million (maturing in December 2010), and one of ?42 million (maturing at the end of 2012). We understand that BDR has agreed with its lenders that the euro-denominated RCF will automatically increase to ?75 million when the British pound sterling-denominated RCF expires at the end of 2010.
- Positive discretionary cash generation that we believe will amount to about ?60 million in 2009, and increase to above ?100 million in the short to medium term.
Scheduled amortization in 2009 and 2010 is about ?51 million and ?58 million, respectively. BDR has maintained the same covenants that previously applied to the Baxi Group; these covenants are tested quarterly. In light of the better credit metrics of BDR compared to Baxi Group, we believe that BDR will enjoy adequate headroom under these covenants in the short to medium term.
The ?100 million 7.875% second-lien secured mezzanine notes issued by Heating Finance PLC, and guaranteed by the new parent BDR and its other subsidiaries, are rated 'B'. The recovery rating is '6', indicating our expectation of negligible (0%-10%) recovery in the event of a payment default. To calculate recovery prospects, we have simulated a default scenario. We consider that the group would be reorganized on a going-concern basis thanks to BDR's relatively strong position in the U.K. market, well-respected brands, and exposure to high-growth emerging markets. Recovery prospects reflect contractual subordination to about ?480 million of first-lien bank debt and approximately ?85 million of other priority debt, as well as BDR's exposure to relatively unfavorable insolvency jurisdictions such as Italy, France, and Spain. Recovery expectations are limited by the subordination of the bond. Our hypothetical default scenario assumes weaker operating performance based on continued distress in the current economic climate, exacerbated by the tough competitive environment. Furthermore, we assume that the increase in market share and efficiencies from synergies will take longer to materialize than originally anticipated. The presence of overlapping and competing brands in France also poses a problem in achieving targeted profitability margins. Under this scenario, we believe that a default is likely to occur in 2012-2013, triggered by an inability to meet maturing debt obligations and to refinance the RCFs. In assessing recovery prospects for the bonds, we assume that the maturing term facilities would be refinanced on similar terms and conditions, rather than being repaid. Therefore, by the time of default, under our scenario, the number of prior-ranking claims would not be materially reduced from today's level. We note, however, that recovery prospects for the mezzanine notes could be enhanced if a substantial proportion of the senior secured facilities were to be repaid rather than refinanced. We expect to publish a detailed recovery report in the next few days.
The stable outlook reflects our view that BDR's credit metrics will improve in line with our base-case scenario assumptions, namely that BDR will be able to generate positive free operating cash flow and reduce its debt levels gradually. At the current rating level, we anticipate that BDR will achieve FFO to debt of about 20% in 2009. We could revise the outlook to negative if we considered that BDR would not be able to achieve and maintain an FFO-to-debt ratio of about 20% beyond 2009, if discretionary cash generation were weaker than we anticipated, or if there were a shift to a more aggressive financial policy. Other factors that could contribute to a downward revision of the outlook include a sustained negative trend in sales, an EBITDA margin lower than the 12% level, and insufficient discretionary cash to cover debt maturities in 2009 and 2010. We could revise the outlook to positive if the company were to improve its key credit metrics more than we anticipate. We would also need to be more certain that the integration and corporate governance of the combined BDR group had been executed effectively.
- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
- Principles Of Corporate And Government Ratings, June 26, 2007
New Rating BDR Thermea Group B.V. Corporate Credit Rating BB-/Stable/-- Ratings Withdrawn To From Baxi Holdings Ltd. Corporate Credit Rating NR CC/Negative Upgraded Heating Finance PLC Subordinated Debt Rating* B C Recovery Rating 6 6 NR--Not rated. *Guaranteed by BDR Thermea Group B.V.
Complete ratings information is available to RatingsDirect on the Global Credit Portal subscribers at www.globalcreditportal.com and RatingsDirect subscribers at www.ratingsdirect.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. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow (7) 495-783-4011.
|Primary Credit Analyst:||Andres Albricci, London (44) 20-7176-7224;|
|Secondary Credit Analyst:||Andreas Zsiga, Stockholm (46) 8-440-5936;|
|Recovery Analyst:||Hina Shoeb, London (44) 20-7176-3747;|
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