DH Services Luxembourg S.a.r.l -- Moody's assigns B2 CFR and provisional debt ratings to DH Services Luxembourg S.a.r.l. (Dematic); outlook negative
Moody's issues provisional ratings in advance of the final sale of securities and these reflect the rating agency's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavor to assign definitive ratings to the instruments mentioned above. A definitive rating may differ from a provisional rating.
Dematic announced in November that funds managed by private equity firms AEA Investors LP and Teachers' Private Capital (the private equity arm of Ontario Teachers' Pension Plan) have reached an agreement to purchase Dematic Holding S.a.r.l. through DH Services Luxembourg S.a.r.l. for an undisclosed consideration. The USD250 million of senior notes as well as the USD 540 million term loan represent the debt financing of the transaction which results in a pro-forma leverage of close to 6x debt/EBITDA as adjusted by Moody's. The new capital structure will also contain a senior secured revolving credit facility of USD75 million.
In connection with the transaction the existing senior secured notes and the outstanding PIK notes will be redeemed. Upon the closing of the transaction and the redemption of the existing indebtedness, Moody's expects to withdraw existing ratings of Dematic Holding S.a.r.l. and its subsidiaries.
The aggressive pro-forma leverage of 6x debt/EBITDA as adjusted by Moody's, compared to previously pro-forma 4.6x debt/EBITDA as adjusted by Moody's, positions the company very weakly in its rating category and leaves little cushion for weaker than expected performance, for example in case of a cyclical downturn or due to weaker project execution, hence the negative outlook assigned to the ratings. Moreover, Moody's believes that the proposed pro-forma starting cash balance is relatively low compared to Dematic's scale. The B2 CFR/PDR ratings incorporate Moody's expectation of a deleveraging driven by EBITDA growth and applying FCF generation to debt repayments.
The affirmation of Dematic's B2 CFR reflects the company's leading market position in its niche of the fragmented automated material handling industry. Dematic has a diversified geographic footprint with leading positions in North America, Europe and Asia. Dematic operates in an inherently late cyclical business and has benefited from an increasing need of its customers for automation of material handling systems in the last three years. Combined with improvements in project execution and a streamlined cost structure, this has supported improvements in EBITDA margins and free cash flow generation, evidenced by solid EBITDA margins of 12.2% as adjusted by Moody's in FY 2012 (fiscal year ends September).
Dematic's rating is constrained by poor and volatile historical operating performance in the years 2007-09 to some extent driven by poor project execution, a risk which remains a factor considered in the ratings despite recent improvements achieved. Dematic remains vulnerable to the risk that customers will curtail their investments into supply chain optimization in a continued weak macroeconomic environment, even though Dematic's exposure to cyclicality is to some extent mitigated by a customer base that mainly consists of companies in the less cyclical retail and food sectors.
The proposed senior notes will be issued by holding company DH Services Luxembourg S.a.r.l. whereas the proposed senior secured term loan and revolving credit facility (senior secured credit facilities) will be issued by Mirror BidCo Corp., a holding company and subsidiary of DH Services Luxembourg S.a.r.l.. Both the senior notes and the senior secured credit facilities will be supported by guarantees from subsidiaries representing not less than 80% of consolidated EBITDA and assets of the group. The (P)Caa1 rating for the senior notes and the (P)B1 ratings on the senior secured credit facilities reflect the effective subordination of the senior notes to the senior secured credit facilities which also benefit from collateral which we understand comprises the guarantors' material assets.
WHAT COULD CHANGE THE RATING UP/DOWN
The ratings could be downgraded in case of negative FCF, a failure to de-leverage towards 5.0x debt/EBITDA in the next 12-18 months or an erosion in the company's liquidity profile.
A rating upgrade is currently unlikely and could be considered if Dematic (1) established a conservative financial policy and a healthy short-term liquidity profile with ample covenant headroom and if Dematic (2) sustained the recent improvements in its operating performance also in a lower volume growth environment which should support debt/EBITDA to move below 3.5x, EBIT/interest expense to move to above 2.0x and positive FCF generation.
The principal methodology used in rating DH Services Luxembourg S.a.r.l and Mirror BidCo Corp was the Global Manufacturing Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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Kathrin Heitmann Analyst Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Matthias Hellstern Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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