S&P Upgraded Stoneridge (SRI) to 'BB'; Sees 'Substantial' Leverage, Net Cash Flow Improvement in FY15 Aug 22, 2014 03:46PM

Standard & Poor's Ratings Services raised its corporate credit rating on Warren, Ohio-based auto supplier Stoneridge (NYSE: SRI) to 'BB' from 'BB-'. The outlook is stable.

At the same time, we revised our recovery rating on the company's senior secured notes to '3', indicating our expectation for meaningful (50%-70%) recovery in the case of default, from '4' (30%-50% recovery expectation). We subsequently raised our issue-level rating on this debt to 'BB' from 'BB-'.

The upgrade reflects our view that Stoneridge Inc.'s debt leverage and cash flow will begin to show substantial improvement in 2015 because of its reduced debt and cost structure. Stoneridge recently sold its wiring business to Motherson Sumi Systems Ltd. for $71.4 million in cash. The company will use a portion of the proceeds to redeem 10% ($17.5 million) of its 9.5% senior secured notes. The company has indicated that it will look into refinancing the remaining senior secured notes and cut its interest expense substantially. We also believe the divestiture will bring greater strategic focus to the company.

We consider Stoneridge's business risk profile to be "weak," reflecting the company's highly competitive and cyclical light and commercial vehicle end markets. We believe these factors together limit the company's ability to mitigate adverse business, financial, or economic conditions.

The company operates in three product segments: electronics (28.7% of 2013 pro forma revenue), control devices (44.3%), and PST (27%). In both the control devices and electronics businesses, the company faces larger and better-capitalized competitors (Sensata, Delphi, and Bosch in control devices and Delphi, Continental, and Bosch in cockpit electronics). Still, we believe the company is positioned to compete with its low-cost production and focus on those higher-margin products that enhance vehicle performance such as shift-by-wire actuators and help reduce emissions such as soot sensors.

The wiring business, on the other hand, is a low-margin business that requires scale to compete successfully. Therefore, the divestiture of the business makes strategic sense in that it allows management to focus on other businesses with greater room for product differentiation and growth. In addition, geographic and customer concentration becomes more balanced relative to global end markets. Sales to North America will represent 46.5% of pro forma 2013 revenue as opposed to 62.8% of actual revenue, South America 27% versus 18.8%, and Europe/other 26.5% versus 18.4%. Also, the top three customers will make up about 24% of pro forma revenue versus about 34% of actual 2013 revenue.

In its Brazilian business, PST, as a result of economic weakness, Stoneridge is restructuring the business through headcount reductions and improved components sourcing. PST's underlying aftermarket businesses (vehicle security, tracking, and infotainment devices) have higher gross margins than its control devices or electronics segments, and we expect it to contribute again significantly to overall margins as economic conditions normalize.

About 37.1% of Stoneridge's sales come from the light-vehicle market and 37.7% from the commercial vehicle market, based on second-quarter results. We expect commercial vehicle production to rise almost 11% in North America in 2014, after falling more than 3% in 2013, and decreasing almost 5% in Europe in 2014. We expect light-vehicle production to increase about 3% in North America and 2% in Europe.

We are revising the company's financial risk profile to "intermediate" from "significant." The company's adjusted debt to EBITDA was 2.5x as of Dec. 31, 2013, and we see leverage falling below 2x during 2014 because of higher overall margins arising from the divestiture of the wiring business and anticipated debt reduction. FOCF to debt was 11% as of Dec. 31, 2013, and we expect this ratio to be in the low-single digits in 2014 but rise above 25% in 2015.


UPDATE: S&P Raises Dynegy (DYN) to 'B+' Following Duke Energy Deal; Outlook Stable Aug 22, 2014 03:44PM

(Updated - August 22, 2014 3:44 PM EDT)

Standard & Poor's Rating Services said today it raised its corporate credit rating on Dynegy Inc. (NYSE: DYN) to 'B+' from 'B' based on our expectations of lower business risk with the acquisition of about 12,300 MW of merchant power plants in the U.S. We raised Dynegy's senior secured debt rating to 'BB', but left the recovery rating unchanged at '1'. We affirmed Dynegy's senior unsecured debt rating at 'B+', but revised the recovery rating to '3' from '2' based on our expectation that Dynegy will issue substantial senior unsecured debt to help fund some of the acquisition cost. The outlook is stable.

The ECP assets include project finance entity EquiPower Resources Holdings LLC, which has debt we rate. We expect this debt will be retired when the acquisition is finalized and will withdraw the rating on this EquiPower debt at that time.

"The acquisitions will improve Dynegy's scale and market diversity materially by adding a large footprint in the favorable PJM and NePool power markets where Dynegy has limited presence," said Standard & Poor's credit analyst Terry Pratt.

The stable outlook reflects our conclusion that Dynegy will complete the acquisitions under the planned capitalization profile of new senior unsecured debt and equity issuance.

If Dynegy cannot complete either the Duke or ECP asset acquisitions, or if the new senior unsecured debt to fund the acquisitions is materially higher than our expectations, then we would likely downgrade the corporate credit rating to 'B'

We do not contemplate any improvement in the rating in the forecast period. An upgrade would require another material reduction in business risk or improvement in financial performance--likely of FFO to debt well above 12x. We think these developments are unlikely.


UPDATE: S&P Raises Dynegy (DYN) to 'B+' Following Duke Energy Deal; Outlook Stable Aug 22, 2014 03:44PM

(Updated - August 22, 2014 3:44 PM EDT)

Standard & Poor's Rating Services said today it raised its corporate credit rating on Dynegy Inc. (NYSE: DYN) to 'B+' from 'B' based on our expectations of lower business risk with the acquisition of about 12,300 MW of merchant power plants in the U.S. We raised Dynegy's senior secured debt rating to 'BB', but left the recovery rating unchanged at '1'. We affirmed Dynegy's senior unsecured debt rating at 'B+', but revised the recovery rating to '3' from '2' based on our expectation that Dynegy will issue substantial senior unsecured debt to help fund some of the acquisition cost. The outlook is stable.

The ECP assets include project finance entity EquiPower Resources Holdings LLC, which has debt we rate. We expect this debt will be retired when the acquisition is finalized and will withdraw the rating on this EquiPower debt at that time.

"The acquisitions will improve Dynegy's scale and market diversity materially by adding a large footprint in the favorable PJM and NePool power markets where Dynegy has limited presence," said Standard & Poor's credit analyst Terry Pratt.

The stable outlook reflects our conclusion that Dynegy will complete the acquisitions under the planned capitalization profile of new senior unsecured debt and equity issuance.

If Dynegy cannot complete either the Duke or ECP asset acquisitions, or if the new senior unsecured debt to fund the acquisitions is materially higher than our expectations, then we would likely downgrade the corporate credit rating to 'B'

We do not contemplate any improvement in the rating in the forecast period. An upgrade would require another material reduction in business risk or improvement in financial performance--likely of FFO to debt well above 12x. We think these developments are unlikely.


Moody's Raises Outlook on Great Lakes Dredge & Dock Corporation (GLDD) to Positive Aug 22, 2014 12:30PM

Moody's Investors Service changed Great Lakes Dredge & Dock's (Nasdaq: GLDD) outlook to positive from stable due to the company's expected continued improvement in operating performance and financial leverage stemming from its re-focus on its core dredging and environmental remediation businesses post the sale of its loss generating demolition business in April 2014. In addition, the expectation of a moderate improvement in EBITDA margins over the intermediate term as the company executes on its current backlog and generates future business from current bidding activity also underlie the outlook change. Great Lakes' ratings including its Corporate Family Rating ("CFR") and Probability of Default Ratings were affirmed at B3 and B3-PD, respectively. Concurrently, Moody's affirmed the rating on the company's unsecured notes due 2019 at Caa1. Great Lakes' speculative grade liquidity rating ("SGL") was affirmed at SGL-3, reflecting an adequate liquidity profile.

Financial leverage pro forma for the sale of the demolition business has improved meaningfully to 4.0x debt/EBITDA (on a Moody's adjusted basis) for the last twelve month period ended June 30, 2014 from close to 6.0x a year ago when the demolition business was part of the company's operations. Although the demolition business was not a sizable portion of the company's revenue base, contributing 10-15% of revenues prior to the sale, the operating losses, internal control weaknesses and reporting issues the company had faced in that business contributed to net losses in this segment.

The outlook change recognizes the company's re-focus on its core dredging business post the sale of the demolition operations and continued healthy backlog. Great Lakes' ratings are constrained at B3 despite improved credit metrics because of risks associated with the company's announced intention to increase debt levels in order to finance the construction of its new $140 million ATB hopper dredge expected to become operational during the second half of 2016. According to Moody's analyst Gigi Adamo, "the company's liquidity profile is not sufficiently robust to cushion the risks associated with newbuild equipment that is debt-funded and not tied to long-term contracts".

Ratings affirmed:

Corporate Family Rating, at B3;

Probability of Default Rating, at B3-PD;

$250 million 7.375% Senior Unsecured Notes due 2019, at Caa1 (LGD-4)

Speculative Grade Liquidity Rating, affirmed at SGL-3

Outlook actions:

Outlook, changed to Positive from Stable

RATINGS RATIONALE

The affirmation of Great Lakes' B3 CFR reflects the highly cyclical and high fixed-cost nature of the dredging industry, high customer concentration and dependence on government funding priorities. Historical earnings variability from quarter to quarter due to the effect of impacts from adverse weather conditions on equipment utilization, changing funding availability and variation in quarterly backlog levels also underscore the ratings. Additionally, the company's operations abroad contribute to costs related to transporting equipment to these destinations, differences in environmental and regulatory conditions, and greater working capital needs. These factors are counterbalanced by Great Lakes' strong market position in the domestic dredging industry and high barriers to entry created by the Jones Act and the sizable amount of capital required to enter the dredging business.

Great Lakes' SGL-3 liquidity rating reflects Moody's expectation that the company will maintain an adequate liquidity profile over the intermediate term. Free cash flow is expected to be negative due to the higher level of capital expenditures required for the construction of the company's sizable new ATB "Articulated Tug/Barge" hopper dredge. In addition, working capital swings related to the seasonal nature of the business and operating abroad also contribute to variability in free cash flow generation. The ratings anticipate continued usage under the company's $175 million revolving credit facility to fund working capital swings and could be used to partially fund the construction of the ATB dredge. Revolver availability was limited at June 30, 3014 quarter-end with availability of $25 million, largely due to letters of credit outstanding of $114.9 million. However, the company reported cash balances of $38 million as of that date and it does not have any meaningful near-term debt maturities. The company is expected to maintain comfortable headroom under covenants over the intermediate term.

The positive outlook is supported by the company's re-focus on its core dredging business and expectations that operating performance and margins will improve as the company executes on its backlog and generates new business from current bidding activity. In Moody's view, investments the company has made to date could support anticipated expected revenue growth over the intermediate term.

The ratings could be raised if the company improves its liquidity position including revolver availability, continues to report a healthy backlog and debt to EBITDA is sustained below the 4.5 times range, inclusive of ATB dredge-related financing.

A meaningful deterioration in the company's earnings performance, liquidity profile or financial metrics such that debt/EBITDA exceeds 6.0 times could pressure ratings.

The principal methodology used in this rating was Global Construction Methodology published in November 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.


S&P Keeps Medtronic (MDT) on CreditWatch Negative Ahead of Covidien Deal Closing Aug 21, 2014 05:14PM

Standard & Poor's Ratings Services today said its ratings, including the 'AA-' corporate credit rating, on Medtronic Inc. (NYSE: MDT) remain on CreditWatch with negative implications, pending the planned acquisition of Covidien plc.

"The proposed transaction strengthens Medtronic's scale, product diversity, and market position, and could represent an additional competitive advantage for the company, offset by a considerable increase in financial risk," said credit analyst David Kaplan. "We estimate Medtronic's reduced cash combined with the debt being assumed from Covidien, and the additional debt to be issued would increase Medtronic's pro forma adjusted net leverage to about 2x to 2.2x at close from about 0.7x."

We will resolve the CreditWatch placement when we have more details on the financials, and the degree to which the company may be committed to maintaining leverage below 2x, especially in the face of other competing strategic priorities.


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