Zodiac Pool Solutions S.? r.l. Assigned #B# Corporate Credit Rating, Stable Acquisition Financing Rated

Stocks and Financial Services Press Releases Tuesday November 29, 2016 09:09
NEW YORK--29 Nov--S&P Global Ratings

NEW YORK (S&P Global Ratings) Nov. 28, 2016--S&P Global Ratings today assigned its 'B' corporate credit rating to Zodiac Pool Solutions S.à r.l. The outlook is stable. The company is operationally headquartered in Vista, California.

At the same time, we assigned our 'B' issue-level rating and '3' recovery ratings to the company's proposed $500 million first-lien term loan due 2023. The '3' recovery rating indicates our expectation for meaningful (lower end of the 50% to 70% range) recovery in the event of payment default. We also assigned our 'CCC+' issue-level rating and '6' recovery rating to the proposed $170 million second-lien term loan due 2024. The '6' recovery rating indicates our expectation for negligible (0% to 10% range) recovery in the event of payment default.

Upon close of the transaction we estimate the company will have roughly $676 million in adjusted debt outstanding. We include $5.5 million worth of operating leases in the adjusted debt balance.

The ratings reflect Zodiac's highly leveraged capital structure, narrow focus in pool maintenance equipment, geographic concentration in the U.S., and the highly seasonal and cyclical nature of the industry. The ratings also reflect Zodiac's above-average EBITDA margins from good pricing power, concentrated supplier position, flexible cost structure due to its large share of outsourced manufacturing, and the relatively stable underlying demand for pool cleaning/maintenance equipment needed to preserve pool functionality and value. We estimate pro forma adjusted debt leverage for this transaction is roughly 6.5x, and we forecast debt to EBITDA to fall to roughly 5x by the end of fiscal 2018 owing to gradual debt reduction and steady EBITDA growth.

Zodiac is a global producer of pool cleaning and equipment, including vacuums, heaters, pumps, filters, water care products, and other goods. Sales are driven by new pool construction (approximately 20% of total market) and existing pool maintenance and upkeep (approximately 80%). The former supports organic market growth, as new pools will eventually generate maintenance sales, which provides a solid stream of recurring revenue for Zodiac and its peers.

The outlook is stable, reflecting our expectation that the company will continue to improve EBITDA through cost reduction, sustained good pricing power, innovation, and supportive market conditions. We expect EBITDA growth to result in increased cash flow, which we believe the company will apply towards debt reduction.

We could consider a negative rating action if the company experiences operating or industry difficulties that result in margins decreasing by over 300 basis points, or if it recapitalizes through an extraordinary dividend, leading forecasted leverage to be sustained above 7.5x.

Given the risk of a future releveraging event resulting from its financial sponsor ownership and the company's narrow business model, it is unlikely that we would consider an upgrade over the next 12 months. We could, however, consider an upgrade if Zodiac's financial sponsor were to reduce its ownership stake to below 40%, while the company adopts a credible financial policy committed to reducing and sustaining leverage below 5x.

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