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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Update: Netherlands-Based BDR Thermea Assigned 'BB-' Rating On Completed Merger; Outlook Stable; Rating On Baxi Withdrawn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

Overview

  • 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.

Rating Action

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 (Baxi) was withdrawn.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.

Rationale

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.

Liquidity
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.

Recovery analysis
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.

Outlook

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. 

Related Research

  • Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
  • Principles Of Corporate And Government Ratings, June 26, 2007

Ratings List

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;
andres_albricci@standardandpoors.com
Secondary Credit Analyst:Andreas Zsiga, Stockholm (46) 8-440-5936;
andreas_zsiga@standardandpoors.com
Recovery Analyst:Hina Shoeb, London (44) 20-7176-3747;
hina_shoeb@standardandpoors.com

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