(The following statement was released by the rating agency)
July 16 -
-- Luxembourg-registered building products manufacturer Xella International S.A. (Xella) faces a significant tightening of its leverage covenant over the next 12 months.
-- As a result, we forecast that covenant headroom will decline to less than 10%. Consequently, we are revising downward our assessment of Xella's liquidity to "less than adequate" from "adequate."
-- We are revising our outlook on Xella to negative from stable and affirming our 'B+' long-term corporate credit and issue ratings on the company.
-- The negative outlook reflects our view of the tightening covenant over the next 12 months, combined with challenging macroeconomic conditions that could adversely affect the group's performance.
On July 16, 2012, Standard & Poor's Ratings Services revised its outlook on Luxembourg-registered building products manufacturer Xella International S.A. (Xella) to negative from stable. At the same time, we affirmed our long-term corporate credit on Xella at 'B+'.
In addition, we affirmed our 'B+' issue rating on the EUR300 million senior secured notes issued by Xella's financing vehicle Xefin Lux S.C.A. The recovery rating on the notes is '3', reflecting our expectation of meaningful (50%-70%) recovery in the event of a payment default.
The outlook revision reflects our view that headroom under Xella's leverage covenant (net debt to EBITDA before one-off items) will decline to less than 10% for the next 12 months. This is due to the meaningful tightening of this covenant, to 2.50x on Sept. 30, 2013, from 3.78x on March 31, 2012. We are therefore lowering our assessment of Xella's liquidity to "less than adequate" from "adequate," as defined in our criteria. The negative outlook also incorporates our view that Xella faces difficult operating conditions because of the economic uncertainties in its central and eastern European markets (excluding Germany).
In our base-case credit scenario, we assume that Xella will report a low- to mid-single-digit increase in revenues in 2012, largely due to price increases achieved toward the end of the financial year ended Dec. 31, 2011, which were maintained during the first five months of 2012. The improvement will be supported by increasing revenues from Germany (accounting for about 51% of the company's total revenues in 2011), as the German new construction market continues to demonstrate resilient growth. However, we believe that improvements in Germany will be partly offset by challenging macroeconomic conditions in Xella's central and eastern European markets, causing volume declines.
Our base case forecasts that Xella's EBITDA margin will remain flat in financial 2012. We base this forecast on our assumption that the benefits of the higher prices will be offset by cost inflation (particularly volatile energy costs) and difficult trading conditions in markets such as the Czech Republic and The Netherlands, which have in the past registered higher margins compared with Xella's other markets.
Under our base-case scenario for the year to Dec. 31, 2012, we anticipate positive free operating cash flows of more than EUR30 million, supported by limited working capital and about EUR80 million of capital expenditures (capex). Additionally, we factor into our forecast the company's recent opportunistic acquisition of a new fiberboard plant in Spain for about EUR22 million (including additional capex to make the plant fully functional).
We note that Xella's credit metrics were slightly weaker in financial 2011 than we previously forecast when we assigned the rating in May 2011. For financial 2012, we estimate that Xella's credit metrics will remain highly leveraged, with Standard & Poor's-adjusted debt to EBITDA of 8.0x (3.7x excluding the shareholder loan) and funds from operations (FFO) to debt of about 8.1% (17.6% excluding the shareholder loan).