NN, Inc. (NNBR) Ratings Affirmed by S&P Following PEP Acquisition

Standard & Poor's Ratings Services today said it affirmed its ratings, including its 'B+' corporate credit rating, on Johnson City, Tenn.-based NN Inc. (NASDAQ: NNBR). The outlook is stable.

At the same time, we assigned our 'BB-' issue-level ratings and '2' recovery ratings to the company's proposed $625 million senior secured revolving credit facility and term loan. The '2' recovery rating indicates our expectation for substantial (70%-90%; higher end of the range) recovery in the event of a payment default.

Additionally, we assigned our 'B' issue-level and '5' recovery rating to NN's proposed $300 million senior unsecured notes. The '5' recovery rating indicates our expectation for modest (10%-30%; lower end of the range) recovery in the event of a payment default.

All issue-level ratings are subject to review of final documentation.

"Our rating on NN reflects the company's improved end-market and customer diversity following its acquisition of PEP," said Standard & Poor's credit analyst Naomi Dsouza.

"Although the company's debt-to-EBITDA metric has increased to over 5x following the proposed transaction, we believe that NN's business strategy remains consistent with its previously announced plan to increase its revenue base and improve its profitability and end-market diversity by 2018," she added.

While the company has been growing aggressively, we had anticipated this as part of NN's previously stated strategy and expect that management will now focus on operational execution and the successful integration of its recent acquisitions and maintain financial discipline going forward.

The stable outlook reflects our expectation that NN will improve its credit metrics, including debt to EBITDA below 5x, with growth in EBITDA margins over the next 12 months through supply chain and productivity improvements.

We could raise our ratings on NN during the next 12 months if we expect the company's FOCF-to-debt ratio to improve to above 10% and its adjusted debt leverage to remain below 4x for a sustained period. We could also raise the ratings if the company demonstrates increased pricing flexibility and higher, sustained gross margins. We believe the most likely driver of margin improvement would be supply chain and productivity improvements as well as higher operating leverage.

While unlikely, we could lower our rating on NN during the next 12 months if it appears that the company's debt-to-EBITDA metric will remain above 5x on a sustained basis or if its FOCF-to-debt ratio will fall below 5%, potentially as a result of acquisition integration issues or worse-than-expected conditions in South America.

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