S&P Lowers Outlook on Kemet Corp. (KEM) to Stable; F&E Product Line Restructuring Should Expand Margins

Standard & Poor's Ratings Services said it revised its outlook on Greenville, S.C.-based capacitor supplier KEMET Corp. (NYSE: KEM) to stable from negative. We affirmed the ratings, including the 'B-' corporate credit rating.

Our issue-level rating on the company's 10.5% secured senior notes due 2018 is 'B-'. The '4' recovery rating on the notes is unchanged and indicates our expectation for average (30% to 50%) recovery in the event of a payment default.

"Our outlook revision is based on our expectation that recent progress in restructuring across tantalum and film and electrolytic (F&E) product lines will lead to continued expansion in gross margins through fiscal 2015," said Standard & Poor's credit analyst James Thomas.

Although we believe that revenue growth will be muted for the rest of the fiscal year, improved margins should enable KEMET to generate over $70 million of adjusted EBITDA for the year, up from $53 million in fiscal 2014. Furthermore, we expect that FOCF, while remaining weak, will turn positive for fiscal 2015 after two years in negative territory.

Our stable outlook on KEMET reflects the company's continued revenue and profitability improvement over the past few quarters, recovering from the revenue decline experienced in early fiscal 2014.

We could lower the rating if the company does not sustain recent operating improvements, leading to continued negative FOCF and diminished cash balances.

Although unlikely over the next 12 months, we would consider raising the rating on KEMET if continued operating efficiency improvements enable further margin expansion and sustained positive free cash flow greater than 5% of debt.

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