July 2, 2012 / 6:16 PM / 5 years ago

TEXT-S&P raises Polypore International rating

Overview
     -- U.S.-based filtration manufacturer Polypore International Inc.  
    has completed its debt refinancing with a $450 million senior secured credit
facility. 
     -- We are raising our issue rating to 'B+' (the same as our corporate 
credit rating) and revising our recovery rating to '4' on Polypore's $365 
million senior notes due 2017. 
     -- We are removing the notes from CreditWatch with positive implications 
following the recently completed refinancing. 

Rating Action
On July 2, 2012, Standard & Poor's Ratings Services raised its issue rating on 
Polypore International Inc.'s $365 million senior notes due 2017 to 'B+' from 
'B' and revised the recovery rating upward to '4', indicating our expectation 
of average (30%-50%) recovery in a payment default, from '5'. We removed the 
issue rating from CreditWatch, where we had placed it with positive 
implications on June 7, 2012.

Rationale
The note upgrade and recovery rating revision reflect our expectation of 
improved recovery prospects for Polypore's unsecured debt. The company 
recently obtained a new $450 million senior secured credit facility, 
comprising a $150 million revolving credit facility and a $300 million term 
loan, to refinance its debt.

The ratings on Charlotte, N.C.-based Polypore reflect the filtration 
manufacturer's "aggressive" financial risk profile and its "weak" business 
risk profile. The company's credit measures are stronger than our expectations 
for the 'B+' corporate credit rating, and we expect steady revenue and profit 
growth in its business segments this year. However, high capital spending 
currently constrains free cash flow generation, and a portion of the company's 
future business prospects depends on customers acceptance of new battery 
technology, the rate of which remains uncertain.

Polypore is one of three major manufacturers operating in the niche battery 
separator business. Polypore manufactures separators for lead-acid and lithium 
batteries (accounting for slightly more than two-thirds of revenues) primarily 
for transportation, industrial, and consumer applications. It also 
manufactures filtration membranes for various health care applications as well 
as industrial processes. We believe demand for lead-acid battery separators, 
which tends to be for replacements rather than new car batteries, will 
continue to be relatively stable. And health care filtration applications have 
historically been fairly resilient to economic cycles. In addition, emerging 
markets should also contribute to growth opportunities. 

In our opinion, the technical nature of Polypore's products and the relatively 
concentrated supply base should translate into attractive margins. We believe 
the lithium separator business, though more volatile than lead-acid, has a 
favorable long-term growth outlook, with support from new battery 
technologies, including for electric drive vehicles (EDV) Despite these 
attributes, we consider Polypore's product line to be fairly narrow, and we 
believe its markets will continue to face technological risks along with some 
degree of customer concentration: Polypore's top five customers accounted for 
about 25% of revenues in 2011, and the rate of adoption of various EDV 
technologies remains uncertain. This could lead to periods of supply-demand 
imbalance. 

Although quarterly performance can be somewhat volatile as evidenced by a drop 
in revenues in the first quarter this year, we expect overall revenue growth 
consistent with our global GDP forecasts of 3%-4%. We also expect steady to 
modestly improved EBITDA margin. Consistent performance in the lead-acid and 
health care businesses should support this. As Polypore continues to undertake 
significant capacity expansion for its lithium battery separator business, we 
expect associated margins to be consistent with the company's average. However 
lower-than-expected capacity utilization could affect profitability. The 
company expects capital expenditure to be about $150 million this year, which 
should be funded from internal cash flows. 

We believe Polypore's financial risk profile will remain "aggressive," 
characterized by high debt. The company's credit metrics, at total debt to 
EBITDA of roughly 3x and funds from operations (FFO) to adjusted total debt 
slightly greater than 20%, are currently somewhat stronger than our rating 
benchmarks of 4x-5x and 15%-20%, respectively. We believe these metrics 
provide some capacity for Polypore to support its significant capital 
spending, which currently constrains its free cash flow generation, or some 
flexibility to weather weaker-than-expected demand or operating performance. 
We note that the company has appealed an FTC ruling ordering the company to 
divest a business (representing about 10% of revenues and profits) that it 
acquired in 2008. The outcome of this litigation remains uncertain, but we do 
not expect it to affect the rating.

Liquidity
We believe Polypore will have adequate sources of liquidity. The company will 
have scheduled debt amortization on its new term loan of roughly $15 million 
each year over the near term. Our assessment of Polypore's liquidity profile 
incorporates the following expectations and assumptions:
     -- We expect the company's sources of liquidity, including cash and 
facility availability, to exceed its uses by at least 1.2x over the next 12 to 
18 months;
     -- We expect net sources to remain positive, even if EBITDA declines more 
than 15%; and
     -- We believe the company's compliance with financial covenants, which 
include a senior leverage covenant could survive a 15% to 20% drop in EBITDA.

Sources of the company's liquidity will include the roughly $80 million cash 
balance as of March 31, 2012, and its new $150 million revolving credit 
facility, which we believe will be largely undrawn at close. Uses of liquidity 
in 2012 include about $10 million in scheduled debt amortization and capital 
expenditures, which we estimate at more than $150 million. We believe this 
number will be significantly less in 2013.

Recovery analysis
Please see Standard & Poor's upcoming recovery report on Polypore, to be 
published on RatingsDirect. 

Outlook
Our long-term rating outlook is stable. We believe Polypore's credit metrics 
will remain somewhat better than our expectations for the rating over the next 
few quarters. We could raise the rating if continued strong demand and high 
capacity utilization translates into improved operating performance and 
stronger cash flow conversion likely in 2013, allowing the company to sustain 
good credit metrics. We could lower the rating, however, if a cyclical 
slowdown reduces activity in the company's end markets or if increased 
competition erodes its market position, resulting in lower revenue and 
worsening credit measures.

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011 
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009 
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List

Rating Affirmed

Polypore International Inc.
 Corporate credit rating                B+/Stable/--       

Upgraded, Removed From CreditWatch; Recovery Rating Revised
                                        To                 From
Polypore International Inc.
 Senior unsecured                       B+                 B/Watch Pos
  Recovery rating                       4                  5

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