New York, November 15, 2012 -- Moody's Investors Service today upgraded Hudson Products Holdings, Inc.'s (Hudson) corporate family rating to B2 from B3. At the same time, Moody's rated the company's new senior secured term loan and revolving credit facilities at B2. The upgrade is largely reflective of the company's improved credit metrics and leverage profile following its proposed refinancing, including the exchange of sponsor held subordinated debt into common stock, as well as the conversion of existing preferred stock into common stock. In addition, the upgrade considers anticipated improvement in the company's operating performance driven by increasing demand in the company's end markets, which primarily relates to energy markets. The rating outlook remains stable.
Hudson is benefiting from stronger order trends driven in large part by wins associated with large US geothermal air-cooled heat exchanger (ACHE) projects and renewed petrochemical investments, as well as orders in oil and gas upstream, midstream, Canadian oil sands, LNG, and power generation. Better operating leverage, coupled with a moderately improved pricing environment, will likely result in a continued expansion in margins, earnings and cash flow leading to a reduction in leverage over the next twelve to eighteen months.
The following rating of Hudson Products Holdings, Inc. has been upgraded:
Corporate family rating (CFR) to B2 from B3;
The following ratings of Hudson Products Holdings, Inc. have been assigned:
$30 million senior secured revolver due 2017 at B2 (LGD3, 33%); and
$190 million senior secured term loan due 2017 at B2 (LGD3, 33%).
The following ratings of Hudson Products Holdings, Inc. have been affirmed:
Probability of default rating at B3
The following ratings of Hudson Products Holdings, Inc. will be withdrawn upon the close of this transaction:
$30 million senior secured revolver due 2015 at B2 (LGD3, 33%); and
$220 million senior secured term loan due 2015 at B2 (LGD3, 33%).
The rating outlook is stable
The B2 rating reflects Hudson's improved, albeit still elevated, leverage profile post-refinancing, high geographic revenue concentration in North America, and its exposure to meaningful fluctuations in operating performance due to its reliance on the capital spending of customers in North American oil & gas, power and petrochemical industries. The rating also considers the company's strong market positioning in both of its key product areas, ACHEs and fans. The highly engineered nature of its ACHE and fan products combined with meaningful aftermarket sales has enabled Hudson to maintain solid margins through the recent downturn. We expect the company to grow its revenues and EBITDA during the next 12 to 18 months while maintaining a healthy backlog, which we view as a proxy for the demand of the company's products.
The stable rating outlook assumes Hudson will continue to grow its backlog and be successful in converting backlog into earnings at improving margin levels. Further, the stable outlook anticipates the company will generate modest free cash flow during the next twelve months.
The ratings are not expected to be upgraded at current debt levels given the cyclical nature of Hudson's operations and the relatively small size of the company. However, should the company broaden its product portfolio and if it can maintain leverage below 4.0 times through the cycle, the ratings could be upgraded.
The ratings could be downgraded if order trends meaningfully deteriorate, which would lead to deterioration in earnings and operating margins. In addition, if liquidity deteriorates due to Hudson's inability to generate free cash flow or maintain adequate covenant cushion, the ratings could come under pressure.
The principal methodology used in rating Hudson Products 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.
Hudson Products Corporation (Hudson), headquartered in Beasley, TX, is one of the world's leading heat transfer solutions companies providing air-cooled heat exchangers (ACHEs), axial-flow fans and related aftermarket hardware and support predominantly to North American oil & gas, power and petrochemical end-markets. Hudson was purchased by Riverstone Holdings LLC (the Sponsor) in 2008 from the prior sponsor. Upon completion of this transaction, the Sponsor will have converted all of its subordinated debt and preferred equity into common equity. Hudson generated revenues in excess of $200 million for the twelve month period ended September 30, 2012.
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Brian Silver Associate Analyst Corporate Finance Group250 Greenwich StreetNew York, NY 10007 U.S.A. Alexandra S. Parker MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.
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