-- U.S. touch-screen provider Elo Touch Solutions has reduced the size of its proposed senior secured credit facilities to $275 million.
-- We are assigning a corporate credit rating of 'B' to the company.
-- At the same time, we are assigning an issue-level rating of 'B+' to its first-lien term loan and revolving credit facility (with a recovery rating of '2'), and an issue-level rating of 'CCC+' to its second-lien term loan (with a recovery rating of '6').
-- The stable outlook reflects our expectation that Elo will generate modest growth, successfully transition to a stand-alone company, and maintain its current leverage profile.
On July 2, 2012, Standard & Poor's Ratings Services assigned a corporate credit rating of 'B' to Menlo Park, Calif.-based Elo Touch Solutions Inc. The outlook is stable.
At the same time, we assigned an issue-level rating of 'B+' to the company's $175 million senior secured first-lien term loan due 2018 and $15 million revolving credit facility due 2017 with a recovery rating of '2', indicating our expectation of substantial (70%-90%) recovery in the event of default.
We also assigned a rating of 'CCC+' to the company's $85 million senior secured second-lien term loan due 2018 with a recovery rating of '6', indicating our expectation of negligible (0%-10%) recovery in the event of default.
The company reduced its first-lien term loan to $175 million from the proposed $180 million and increased pricing to LIBOR plus 650 from the proposed LIBOR plus 525. It also reduced its second-lien term loan to $85 million from the proposed $90 million and increased pricing to LIBOR plus 1025 from the proposed LIBOR plus 925. These changes do not affect our ratings on the company.
Elo used the proceeds to fund The Gores Group's acquisition of the company from TE Connectivity.
The ratings on Elo reflect its "vulnerable" business risk profile based on its narrow market focus in the fragmented and competitive touch-screen solutions industry, its concentrated customer base and retail end market, and its lack of a track record operating as a stand-alone company. Partially offsetting these factors are its strong presence in the retailer segment and its relationships with distributors and original equipment manufacturers (OEMs). The company has an "aggressive" financial risk profile, reflecting its leveraged capital structure, with pro forma Standard & Poor's adjusted leverage that we expect will remain near 5x over the medium term.
Elo is a supplier of touch-screen products and components to distributors and OEMs serving commercial end users. Retailers, who use Elo's products at the point-of-sale, are the company's largest end market, followed by health care providers who require specific designs to satisfy FDA regulations. The company's products are also used in transportation, gaming, and industrial markets. The market for touch-screen solutions is fragmented, with competition coming from OEMs, as well as smaller foreign manufacturers.
In our view, Elo has a vulnerable business risk profile resulting from its niche market position within the touch-screen solutions industry and its concentrated retail end market and customer base, with its top few distributors making up a significant portion of revenue. However, the company has built a defensible position in its niche serving the retailer end market based on solid relationships with distributors, value-added resellers (VARs), and OEMs. Nonetheless, it is in a more mature segment of the overall touch-screen market and could face challenges from new technologies or form factors.
Elo generated approximately $439 million in revenue for the 12 months ended March 2012, up about 11% over the year-ago period, with EBITDA margins in the mid-teens. In the future, we expect growth in the low-single-digit area with EBITDA margins in the low- to mid-teens as Elo incurs additional costs to operate as an independent company. We also expect that free operating cash flow (FOCF) will be depressed over the intermediate term as the company invests in its stand-alone infrastructure.
Elo has an aggressive financial risk profile, with pro forma adjusted leverage of 4.8x and pro forma funds from operations (FFO) near 10% as of March 2012. We anticipate that de-leveraging will be limited over the intermediate term given the modest EBITDA growth anticipated and investment requirements over the coming year.
Pro forma for the transaction, we anticipate that Elo will have "adequate" liquidity, with cash sources including $20 million of cash, $15 million of capacity under its revolving credit facility, and positive FFO. We expect annual uses over the next 24 months to include working capital investment and capital expenditures near $14 million and debt amortization of $2 million.
Our assessment of the company's liquidity profile includes the following expectations and assumptions:
-- Sources of cash will exceed uses by 20% over the next 12 to 24 months.
-- Net sources will be positive, even with a 15% decline in EBITDA.
-- The company will maintain at least 15% headroom under financial covenants.
For the complete recovery analysis, please see the recovery report on Elo, published on RatingsDirect on May 9, 2012.
The stable outlook reflects our expectation that Elo will generate modest growth and successfully transition to a stand-alone company. We anticipate that it will not de-lever materially over the intermediate term as it uses cash flow for investing in its stand-alone infrastructure and generates limited EBITDA growth, and therefore an upgrade is unlikely. We could lower the rating if stand-alone transition challenges, increased competition, or a large customer loss cause EBITDA to decline and leverage to increase to the mid-5x area.
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New Ratings Elo TouchSystems Inc.
Corporate Credit Rating B/Stable/--
US$85 mil fltg-rate 2nd-lien term
CCC+ bank ln due 2018 Recovery Rating 6
US$15 mil fltg-rate revolving bank B+
ln due 2017
Recovery Rating 2
US$175 mil 1st-lien term bank ln B+
Recovery Rating 2