Erpe Midco, Parent Of Perimeter Protection Provider Praesidiad, Assigned #B# Long-Term Outlook Stable

Stocks and Financial Services Press Releases Tuesday November 28, 2017 17:51
STOCKHOLM--28 Nov--S&P Global Ratings

STOCKHOLM (S&P Global Ratings) Nov. 28, 2017--S&P Global Ratings said today that it had assigned its 'B' long-term corporate credit rating to Erpe Midco Ltd., parent company of Praesidiad. The outlook is stable.

At the same time, we assigned a 'B' issue rating to the group's EUR320 million term loan B, issued by the core subsidiary Erpe Bidco Ltd. The recovery rating is '4', indicating our expectation of average recovery (30%-50%; rounded estimate: 40%) in the event of a payment default.

The ratings are at the same level as our 'B' preliminary ratings assigned on Sept. 11, 2017, because the final documentation is in line with the preliminary documentation.

Private equity group Carlyle has acquired 100% of the shares in Belgian-based perimeter protection provider Praesidiad from CVC Capital Partners for an enterprise value of EUR660 million. The group has issued a seven-year EUR320 million term loan B, comprising EUR290 million euro denominated with a EURIBOR+400 basis points (bps) margin and EUR30 million U.S. dollar denominated with a LIBOR+450bps margin, to finance the acquisition and transaction-related costs, and to repay all of its outstanding debt. The group has also issued a EUR80 million revolving credit facility (RCF), which was undrawn at the transaction's close.

Praesidiad has a leading position in its niche within the global perimeter protection market, providing perimeter security solutions and safety barriers for military and industry, and manufacturing metal fences for general purposes. We view the group's business risk as weak and its financial risk profile as highly leveraged after the acquisition by Carlyle and the related refinancing.

Praesidiad remains smaller than global capital goods peers that operate across many markets and sectors. We forecast revenue of about EUR450 million and EBITDA of EUR70 million in 2017. The group has two main business lines, baseline and high security. We see the baseline general purpose fencing as having limited product differentiation, relatively low profitability, and limited growth in end markets. This weakness is to an extent offset by the recent restructuring of the baseline manufacturing activities, which has significantly reduced the cost base related to the group's manufacturing footprint.

We view the group's transformation over the past 18 months as positive for the group's credit profile, with the acquisition of HESCO, an increasing shift to high security, and continued business repositioning. The group has also diversified its end markets for its high security segment--previously military and oil and gas--and is growing in the energy sector and in new-end markets like data centers. HESCO, which has a dominant position in military perimeter security, contributes in terms of diversification, complementary product offering, strong brand recognition among the targeted client base, and superior margins. We further view positively the group's strategic focus in developing the business toward providing full perimeter security solutions for military and industrial clients, with significantly higher value-added for the end customer, as well as higher profitability and growth potential.

Praesidiad is increasingly shifting its business focus to the high security segment, which represented about 60% of group EBITDA in 2016. The group enjoys a stronger market position and higher margins in this segment, and we expect the shift will continue to improve the group's profitability over the coming years. Demand for high security solutions is growing, strongly driven by international or national events requiring solutions to protect individuals and objects. Although this segment is to some extent event-driven, it adds stability to the group as it is less dependent on economic cycles than the baseline products.

The major constraints to Praesidiad's financial risk profile are the group's aggressive financial policy, owing to its private equity ownership and its highly leveraged capital structure. We forecast adjusted debt to EBITDA of about 5x in 2018-2019. We add about EUR70 million of debt adjustments related to factoring and operating-lease obligations. The group's financial risks are mitigated by its strong cash conversion profile, benefitting from the low capital intensity of the business, with replacement capital expenditures estimated at only about 2%-3% of sales, and moderate working capital needs. We therefore expect the group to generate positive free operating cash flows (FOCF) of above EUR20 million per year. We also note the group's relatively strong funds from operations (FFO) cash interest coverage for the rating, which we forecast will remain above 4x over 2018-2019.

The stable outlook reflects our view that Praesidiad will benefit from its recent cost optimization and be able to continue the shift toward high security, thereby further improving profitability. We anticipate that the group will gradually deleverage and continue to generate positive FOCF. We expect adjusted FFO cash interest coverage to remain above 2.5x.

We could lower the rating if the group failed to sustain its improved operating performance, for example was not able to achieve higher margins and cash flow generation, or continued to incur material restructuring costs. Downward pressure could also arise through higher volatility of cash flows than expected, or debt-financed acquisitions that led to higher leverage and weaker coverage ratios, in particular FFO cash interest coverage below 2.5x.

We view rating upside as remote over our outlook horizon of 12 months, but we could consider raising the rating if Praesidiad demonstrated solid growth in revenue and margins through successfully growing within the high security segment. An upgrade would also require credit metrics in line with an aggressive financial risk profile category, with debt to EBITDA comfortably and sustainably below 5x. An upgrade would also be contingent on our view that any improvement would be supported by a conservative financial policy.


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