S&P Downgrades Manitowoc (MTW) to 'B'; Outlook is Negative

November 9, 2016 12:48 PM EST

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S&P Global Ratings said that it has downgraded Manitowoc Co. Inc. (NYSE: MTW) to 'B' from 'B+'. The outlook is negative.

At the same time, we lowered our issue-level rating on the company's senior secured notes to 'B' from 'B+'. The '3' recovery rating remains unchanged, indicating our expectation for meaningful (50%-70%; lower half of the range) recovery in the event of a payment default.

"The downgrade reflects the extremely soft global demand for cranes, which has weakened the company's operating performance and caused its credit metrics to deteriorate through the third quarter of 2016," said S&P Global credit analyst Tyrell Peebles. The company downwardly revised its guidance for the balance of 2016 and we expect that its operating environment will remain challenged, at least through 2017, because of the excess supply of crane equipment in its industry. Therefore, we expect that Manitowoc's revenue will continue to decline in 2017, though at a more moderate pace, and anticipate that this decline will be partially mitigated by modest margin improvement from management's restructuring initiatives and new product launches. Incorporating these expectations, we believe that Manitowoc's adjusted debt-to-EBITDA metric will be about 8x in 2016, improving to about 6x in 2017. Although we expect the company's leverage to remain high, we believe that it will generate modest free operating cash flow (FOCF) and maintain its moderate cash balances (including the availability under its asset-based lending [ABL] facility). In addition, we expect the company to maintain at least a 15% cushion under its 1x fixed-charge covenant over the next 12-18 months.

The negative outlook on Manitowoc reflects our expectation that continued weak demand in the company's end markets will constrain its operating performance and cause its leverage metrics to become elevated over the next 12-18 months. The negative outlook also incorporates the potential for further deterioration in the company's operating performance, which could limit its ability to reduce its leverage from currently elevated levels.

We could lower our rating on Manitowoc if the company's operating performance is weaker than we expect and its leverage remains above 6.5x over the next 12 months with limited prospects for improvement. Additionally, we could consider lowering our rating on the company if we expect its free cash flow generation to turn negative on a sustained basis and its liquidity becomes constrained such that the headroom under the fixed charge covenant on its ABL revolver is meaningfully reduced.

We would consider revising our outlook on Manitowoc to stable if the company is able to reduce its leverage below 6.5x on a sustained basis and we expect it to generate modest free cash flow.

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