France-Based Capital Goods Company Delachaux #B+# Rating Placed On CreditWatch Positive On Planned IPO And Refinancing

Stocks and Financial Services Press Releases Tuesday June 12, 2018 18:42
MILAN--12 Jun--S&P Global Ratings

MILAN (S&P Global Ratings) June 12, 2018--S&P Global Ratings said today that it has placed its 'B+' long-term issuer credit rating on French capital goods company Delachaux S.A. on CreditWatch with positive implications.

We also put on CreditWatch positive our 'B+' rating on the company's senior secured term loan and revolving credit facility (RCF). The recovery rating is '4', indicating our expectation of average recovery (rounded estimate: 40%) for debtholders in the event of a default.

We expect to withdraw the issue and recovery ratings once the new capital structure is in place.

The CreditWatch placement follows Delachaux's recent announcement that it intends to be listed on the Paris Stock Exchange, which we understand could happen before the end of June 2018. If the IPO is finalized as proposed, we believe it would enhance the company's credit profile, through:

  • Lower absolute debt and a more relaxed debt maturity profile, thanks to a new EUR450 million senior unsecured refinancing package. Moreover, EUR100 million of equity proceeds and about EUR100 million of cash on the balance sheet will be used to repay debt currently outstanding. As of year-end 2017, Delachaux's reported debt totaled about EUR655 million, linked almost entirely to senior secured facilities taken in 2014. After the proposed IPO, debt repayment, and refinancing, Delachaux's gross debt is expected to consist of about EUR450 million of new senior unsecured term loans due 2023. In addition, the company will receive a new senior unsecured RCF of EUR75 million due 2023. We understand the company will be subject to one leverage covenant tested bi-annually from Dec. 31, 2018, implying net debt to EBITDA below 4.0x, under which we expect Delachaux will have ample headroom under the new capital structure. In the current structure, the company is subject to a springing net leverage covenant of 7.5x, which is tested only when drawings on the RCF exceed 30% of the facility.
  • A change of the ownership structure, implying better visibility and understanding of the company's future strategy and financial policy. Currently CVC through its directly controlled subsidiary, Financiere Danube, holds close to 50% of Delachaux's share capital. Some of the IPO proceeds will be used to reduce CVC's stake to between 9.8% and 15% for six months after the company's listing (lock-in period). We understand that the EUR230 million payment-in-kind preference shares at Financiere Danube will cease to exist, leaving Delachaux's cash balance unaffected. This could further enhance Delachaux's credit profile, since we previously adjusted its reported debt for that amount. The listed entity, named Delachaux Group, will merge with Delachaux S.A. After the IPO, we expect CVC's stake will progressively reduce to zero, while the Delachaux family will maintain a controlling stake of slightly more than 50%. Moreover, the company has proposed a new dividend policy of 35%-40% for 2019 and 2020. We will monitor the new financial policy as part of the CreditWatch review.

We continue to think that Delachaux's business risk profile is supported by the group's global positions in niche markets, which feature high barriers to entry and an inherently stable revenue base. According to the company's management, Delachaux is the leader in all the markets it serves. In rail infrastructure, it has a 20% market share in the fastening system sector, and a 45% market share in the alumino thermic welding segment. Moreover, in the diversified business segment, Delachaux is No. 1 in the energy and data-management systems market with a share of about 20%, and has a 25% share of the chromium metal market.

Under our base case, we forecast Delachaux can maintain adjusted EBITDA margins of 14%-15% in 2018, compared with the 14.8% it reported in 2017, with revenue increasing by about 1% to about EUR850 million, from EUR841 million last year. The company's guidance is EUR900 million of sales in 2018. We believe the revenue increase will be supported by some improvement in the rail business, as well as new projects beyond maintenance, where we anticipate growth of 1.5% year on year versus 2.3% in 2017. In our base case, we've also incorporated small potential bolt-on acquisitions, in line with the company's external growth strategy, which should boost revenues further in 2019.

If the IPO, change of ownership, and refinancing go through as planned, and the preferred notes at Financiere Danube no longer affect our adjusted debt calculations, we anticipate that Delachaux's debt-protection metrics will improve, with adjusted debt approaching EUR500 million compared with EUR957 million at year-end 2017. We believe this would result in stronger debt-metric forecasts for year-end 2018, with funds from operations (FFO) to debt increasing to 13%-15% from 6%-8% and debt to EBITDA reducing below 4x, compared with 7x-9x. This could lead us to revise upward our assessment of Delachaux's financial risk profile to aggressive from highly leveraged.

The CreditWatch indicates that we could raise the ratings by one notch if the IPO and refinancing are completed in line with our expectations. We aim to resolve the CreditWatch toward the end of the year, after Delachaux's completion of the IPO, the new capital structure, and decrease of CVC's stake to negligible levels. An upgrade would also depend on the preferred shares at Financiere Danube, which are ultimately owned by CVC, being removed from our adjusted debt calculations and delinked from Delachaux. However, this is contingent on our assessment of Delachaux's financial policy after the first few months of the company's listing, and the company's operating performance and the macroeconomic environment remaining supportive.

If the IPO does not take place as planned, and Delachaux's capital and ownership structure are unchanged, we would likely affirm our 'B+' rating.

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