April 5, 2012 / 4:52 PM / 6 years ago

TEXT-S&P may cut Viasytems rating

Overview	
     -- U.S. printed circuit board (PCB) manufacturer Viasystems recently 	
announced that it entered into an agreement to acquire PCB manufacturer DDi 	
Corp. for $282 million.	
     -- Viasystems plans to raise up to $300 million in debt to finance the 	
acquisition and pay for related fees and expenses.	
     -- In our opinion, the transactions strengthens Viasystems market share 	
in the fragmented North American PCB industry.	
     -- At the same time, we are affirming our 'BB-' corporate credit rating 	
on Viasystems.	
     -- We are placing our 'BB-' issue-level rating on the company's senior 	
secured notes on CreditWatch with negative implications due to the expected 	
increase in debt within the capital structure that could result in a revised 	
recovery rating.	
	
Rating Action	
On April 5, 2012, Standard & Poor's Ratings Services affirmed its 'BB-' 	
corporate credit rating on St. Louis-based printed circuit board (PCB) 	
manufacturer Viasystems Group Inc. 	
	
At the same time, we placed our 'BB-' issue level rating on the company's 	
senior secured notes on CreditWatch with negative implications.  	
	
The action follows the company's announcement that it has reached a definitive 	
agreement to purchase U.S. PCB manufacturer DDi Corp. in an all-cash 	
transaction value of $283 million.	
	
We placed our issue-level rating on CreditWatch Negative due to increased debt 	
and potentially diminished recovery prospects on the senior secured notes. The 	
senior secured notes currently have a '4' recovery rating, indicating an 	
expectation for average (30%-50%) recovery in the event of a payment default.	
	
We affirmed our 'BB-' corporate credit rating on Viasystems since it had debt 	
capacity within the current rating to complete the proposed acquisition of DDi.	
	
Rationale	
The corporate credit rating affirmation reflects our view that Viasystems has 	
sufficient incremental leverage capacity within the rating to absorb the 	
proposed acquisition. The rating allows for leverage under 4x through a cycle 	
and we expect pro forma leverage to rise to about 3x from 1.6x in December 	
2011. We believe that Viasystems preserves some capacity to absorb industry 	
cyclicality, albeit on a reduced basis.	
	
With pro forma revenues of $1.3 billion as of Dec. 31, 2011, we estimate the 	
combined company will become the second-largest PCB manufacturer in the 	
fragmented North American PCB market. We believe that DDi will complement 	
Viasystems' operations by expanding its product and customer base, 	
particularly within the military/aerospace end markets. The acquisition 	
requires consent of DDi shareholders and customary regulatory approval, and is 	
likely to close late in the second quarter or early in third quarter of 	
calendar year 2012. The proposed debt funded transaction received a financing 	
commitment from a group of lenders; terms and conditions of the debt financing 	
were not made public. The total transaction value for the acquisition is $283 	
million.  	
	
However, we view the increased debt related to the acquisition of DDi as a 	
potential negative for the company's senior secured notes recovery profile. 	
Specifically, we placed our 'BB-' issue level rating on CreditWatch with 	
negative implications due to increased debt and potentially diminished 	
recovery prospects on the senior secured notes in the event that the proposed 	
$300 million debt issuance is pari passu with existing senior secured notes. 	
Alternatively, if the company issues $300 million of notes which are 	
contractually subordinated to the existing secured notes, there may not be any 	
rating impact on the existing secured notes.	
	
Pro forma for the proposed transaction, Viasystems' adjusted leverage will 	
increase to 3.0x from 1.6x as of Dec. 31, 2011, due to the increased debt, 	
partly offset by DDi's EBITDA contribution of about $34 million.	
	
We currently view Viasystems' business risk profile as weak, reflecting its 	
operation in the highly cyclical PCB industry and technology risks inherent in 	
the contract manufacturing market. PCB demand faces considerable volatility 	
through the business cycle and, when combined with high fixed manufacturing 	
costs, the industry can experience wide profitability swings. Both Viasystems' 	
established position in low-cost manufacturing locations and its leading 	
original equipment manufacturer customer base across a number of end markets 	
partially offset those weaknesses.	
	
CreditWatch	
Standard & Poor's will monitor the progress of the acquisition and the terms 	
and conditions of the debt financing, specifically, whether the proposed debt 	
will be secured or unsecured, inter alia, in determining the issue-level 	
rating outcome.  	
	
Related Criteria And Research	
     -- Issuer Ranking: Global Technology Ratings, Strongest To Weakest, March 	
29, 2012	
     -- U.S. Technology Companies' Liquidity Is Higher, For Now, Jan. 18, 2012	
     -- Industry Economic Outlook: Slow Global IT Spending Growth Is Likely To 	
Continue Into 2012, Jan. 12, 2012	
     -- Reshuffling The Debt: Global High-Tech M&A Activity Accelerates, Oct. 	
13, 2011	
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011	
     -- Key Credit Factors: Methodology And Assumptions On Risks In The Global 	
High Technology Industry, Oct. 15, 2009	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
Ratings List	
	
Ratings Affirmed	
	
Viasystems Group Inc.	
 Corporate Credit Rating                BB-/Stable/--      	
	
Ratings Placed On CreditWatch; Recovery Rating Unchanged	
                                        To                 From	
Viasystems Group Inc.	
 Senior Secured                         BB-/Watch Neg      BB-	
   Recovery Rating                      4                  4

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