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Moody's Upgrades Park-Ohio Industries (PKOH) CFR to 'B1'; Notes Organic Growth, Improving Credit Profile

May 19, 2015 3:30 PM EDT

Moody's Investors Service ("Moody's") upgraded Park-Ohio Holdings (Nasdaq: PKOH) Corporate Family Rating to B1 from B2 and its Probability of Default Rating to B1-PD from B2-PD. At the same time, Moody's affirmed the $250 million senior unsecured notes at B3. The Speculative Grade Liquidity Rating was affirmed at SGL-2. The outlook is stable.

Ratings upgraded:

Corporate Family Rating to B1 from B2

Probability of Default Rating to B1-PD from B2-PD

Ratings affirmed:

$250 million senior unsecured notes at B3(LGD5)

Speculative Grade Liquidity Rating at SGL-2

Outlook actions: Changed to stable from positive

The ratings upgrade reflects the company's growing size and scale through organic growth and acquisitions with revenues to exceed $1.5 billion in 2015 while improving its credit profile. Park-Ohio benefitted from strong end market demand, particularly the North American automotive sector over the last year and Moody's expects these trends to continue throughout 2015 in most of these markets. Credit metrics should continue to improve in 2015 as the company works to integrate recent acquisitions and improves operating performance of its core businesses. In pursuit of meeting its publicly stated growth plan of achieving $2 billion in sales by the end of 2017, Moody's believes the company will maintain debt to EBITDA on average below 4 times.

The B3 rating on the senior unsecured notes was affirmed given its subordination to the $275 million secured revolver and $35 million secured term loan ahead in the capital structure.

RATINGS RATIONALE

The B1 Corporate Family Rating ("CFR") is constrained by moderate size, cyclical end market demand. The company has moderate concentration of roughly 40% in the automotive sector. The rating benefits from a broad product portfolio, relatively diversified customer base, a history of successful integration of business acquisitions, and countercyclical cash flows that support liquidity during an economic downturn. Moody's expects strong growth in 2015 driven primarily by continued strength in the auto sector. Acquisitions may subside in the near term but will continue to be a piece of its strategy to achieve $2 billion of revenue by the end of 2017. In 2015, Park-Ohio faces headwinds from foreign exchange and some oil & gas exposures but strong growth and improving operating performance should offset these resulting in credit metric improvements.

The SGL-2 Speculative Grade Liquidity Rating is supported by cash balances of close to $40 million and expected cash flows from operation approaching $70 million over the next 12-15 months. Capital expenditures are expected to be high in 2015 and Moody's believes the pace of acquisitions may slow as the company integrates its recent businesses, although they cannot be ruled out. The company has approximately $83.2 million of availability under its $275 million revolver as of March 31, 2015. The revolver has a minimum debt service coverage ratio of 1 times which Moody's expects the company to be well in compliance.

The stable outlook reflects Moody's expectation of continued strength in the North American automotive sector as well as strength in other key end markets that will result in improving credit metrics.

The ratings are unlikely to be upgraded without a sizable increase in scale alongside improved operating margins. Additionally, debt to EBITDA sustained below 3 times could result in an upgrade. The ratings could be downgraded if debt to EBITDA were sustained above 4 times or if margins materially contracted or if liquidity deteriorated substantially.

The principal methodology used in these ratings was Global Automotive Supplier Industry published in May 2013. 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.



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