S&P Ratings Puts Exide Technologies (XIDE) on Credit Watch Negative
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Standard & Poor's Ratings Services said today that it placed its 'B-' corporate credit rating and its issue-level ratings on Exide Technologies (Nasdaq: XIDE) on CreditWatch with negative implications.
"We placed the ratings on CreditWatch with negative implications because of our view of an increased likelihood of a downgrade over the next 12 months after the company retained a financial advisory firm to help with financing alternatives," said Standard & Poor's credit analyst Nishit Madlani. The CreditWatch placement reflects uncertainty over Exide's financial risk profile given the impact of recent developments on its businesses, including significant stock price declines, potentially unfavorable trends in trade terms, and--ultimately--cash flow and liquidity. At this stage, the company has not publicly announced any details on transaction structure and timing.
We now view the company's liquidity position as "less than adequate" (from adequate) given recent indications of a weaker standing in credit markets, and its currently high leverage, which could further limit financial flexibility in fiscal 2014 (ending March 31). Though liquidity sources cover liquidity uses by more than 1.2x on average over the next 12 months, we continue to believe that liquidity headroom has reduced significantly year over year relative to cash needs over the next 12 months.
Although Exide expects fiscal 2013 fourth-quarter free operating cash flow (FOCF) to exceed prior guidance, (total liquidity as of March 31, 2013, was disclosed at about $230 million), we expect limited cash flow prospects over the next two years. We also expect execution risks to heighten over the next few quarters as the company faces the challenge of reducing working capital requirements, minimizing restructuring cash costs, and tightly managing capital expenditures. This is critical because the maturity of Exide's convertible senior subordinated notes (roughly $56 million) in September 2013 will reduce availability under its asset-based loan (ABL) facility at the same time when working capital needs peak.
The ratings on Exide reflect our assessment of its financial risk as "highly leveraged" and its business risk profile as "vulnerable."
Ongoing execution risk related to addressing structural cost issues in its European transportation businesses, an overall competitive pricing environment, lead-price volatility, and potentially large swings in working capital remain risks to credit quality.
The CreditWatch placement reflects at least a one-in-two likelihood that we will downgrade Exide to 'CCC+' or below over the next 12 months.
We aim to resolve the CreditWatch listing within the next 60-90 days, once we have greater visibility into the company's financial arrangements and we can gauge the effect of the plan on Exide' credit quality. We will assess the impact of recent developments on Exide' businesses, trade terms, liquidity, and cash flow over our review period.
We could lower the rating if Exide's FOCF use is likely to approach $15 million or more in fiscal 2014, potentially resulting from the company's inability to improve its liquidity and manage working capital requirements with a sustainable capital structure. We could also lower the rating if further headwinds to its financial flexibility were to materialize. For instance, a delay in the receipt of proceeds from the sale of its Frisco, Texas, property could limit Exide's ability to invest in capital expenditures required to support its business prospects. Downward rating pressure on the company could also arise if it appears likely to engage in a debt exchange that we would classify as a distressed exchange.
We could affirm the rating if Exide adopts a financing arrangement that improves liquidity with sustained deleveraging prospects and if its FOCF performance in fiscal 2014 is likely to be in line with our expectation (use of less than $10 million).
"We placed the ratings on CreditWatch with negative implications because of our view of an increased likelihood of a downgrade over the next 12 months after the company retained a financial advisory firm to help with financing alternatives," said Standard & Poor's credit analyst Nishit Madlani. The CreditWatch placement reflects uncertainty over Exide's financial risk profile given the impact of recent developments on its businesses, including significant stock price declines, potentially unfavorable trends in trade terms, and--ultimately--cash flow and liquidity. At this stage, the company has not publicly announced any details on transaction structure and timing.
We now view the company's liquidity position as "less than adequate" (from adequate) given recent indications of a weaker standing in credit markets, and its currently high leverage, which could further limit financial flexibility in fiscal 2014 (ending March 31). Though liquidity sources cover liquidity uses by more than 1.2x on average over the next 12 months, we continue to believe that liquidity headroom has reduced significantly year over year relative to cash needs over the next 12 months.
Although Exide expects fiscal 2013 fourth-quarter free operating cash flow (FOCF) to exceed prior guidance, (total liquidity as of March 31, 2013, was disclosed at about $230 million), we expect limited cash flow prospects over the next two years. We also expect execution risks to heighten over the next few quarters as the company faces the challenge of reducing working capital requirements, minimizing restructuring cash costs, and tightly managing capital expenditures. This is critical because the maturity of Exide's convertible senior subordinated notes (roughly $56 million) in September 2013 will reduce availability under its asset-based loan (ABL) facility at the same time when working capital needs peak.
The ratings on Exide reflect our assessment of its financial risk as "highly leveraged" and its business risk profile as "vulnerable."
Ongoing execution risk related to addressing structural cost issues in its European transportation businesses, an overall competitive pricing environment, lead-price volatility, and potentially large swings in working capital remain risks to credit quality.
The CreditWatch placement reflects at least a one-in-two likelihood that we will downgrade Exide to 'CCC+' or below over the next 12 months.
We aim to resolve the CreditWatch listing within the next 60-90 days, once we have greater visibility into the company's financial arrangements and we can gauge the effect of the plan on Exide' credit quality. We will assess the impact of recent developments on Exide' businesses, trade terms, liquidity, and cash flow over our review period.
We could lower the rating if Exide's FOCF use is likely to approach $15 million or more in fiscal 2014, potentially resulting from the company's inability to improve its liquidity and manage working capital requirements with a sustainable capital structure. We could also lower the rating if further headwinds to its financial flexibility were to materialize. For instance, a delay in the receipt of proceeds from the sale of its Frisco, Texas, property could limit Exide's ability to invest in capital expenditures required to support its business prospects. Downward rating pressure on the company could also arise if it appears likely to engage in a debt exchange that we would classify as a distressed exchange.
We could affirm the rating if Exide adopts a financing arrangement that improves liquidity with sustained deleveraging prospects and if its FOCF performance in fiscal 2014 is likely to be in line with our expectation (use of less than $10 million).
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