Energy Holdings (Cayman) Ltd. Assigned #B# Ratings On Leveraged Outlook Negative

Stocks and Financial Services Press Releases Tuesday June 5, 2018 10:16
NEW YORK--5 Jun--S&P Global Ratings

NEW YORK (S&P Global Ratings) June 4, 2018--S&P Global Ratings today assigned its 'B' corporate credit rating on St. Louis-based Energy Holdings (Cayman) Ltd., the parent holding company of wire harness and sub-assembly provider Electrical Components International Inc. The outlook is negative.

At the same time, we assigned our 'B' issue-level and '3' recovery ratings to the company's proposed first-lien credit facilities, which comprise a $100 million revolver due in 2023 and a $570 million term loan due in 2025. The '3' recovery rating indicates our expectation for meaningful (50%-70%; rounded estimate: 50%) recovery in a payment default scenario.

Additionally, we assigned our 'CCC+' issue-level rating and '6' recovery rating to the company's proposed $125 million second-lien term loan due in 2026. The '6' recovery rating indicates our expectation for negligible (0%-10%; rounded estimate: 5%) recovery in a payment default scenario.

Our ratings and outlook on ECI reflect the company's high leverage following its acquisition by new financial sponsor Cerberus. The company is issuing a $570 million first-lien term loan and $125 million second-lien term loan to partially fund the acquisition and to repay existing debt. Specifically, we estimate ECI's pro forma adjusted debt to EBITDA will increase to approximately 6.7x immediately following the transaction from 5.9x as of Dec. 31, 2017. Our ratings and outlook also reflect the potential that the company's credit measures may stagnate or deteriorate further as management undertakes additional debt-funded mergers and acquisitions (M&A).

The negative outlook on ECI reflects the 1-in-3 chance that we will lower our ratings on the company over the next year if it cannot substantially reduce leverage to more appropriate levels for the current rating (specifically adjusted debt to EBITDA of 6.5x).

We could lower our ratings on ECI over the next 12 months if its adjusted debt to EBITDA remains above 6.5x on a sustained basis. This could occur if, for instance, economic conditions worsen and white goods appliance sales decline meaningfully, causing revenue and earnings to deteriorate, or if the company pursues debt-funded acquisitions/shareholder rewards.

We could revise our outlook on ECI to stable if its adjusted debt to EBITDA declines below 6.5x and remains there. This could occur if the company properly executes on synergy implementation resulting in improved EBITDA margins, allowing it to generate higher-than-expected free cash flow to reduce its debt. In addition, we would need the company's financial sponsor to commit to begin repaying its debt.

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