OREANDA-NEWS. S&P Global Ratings today raised its long-term corporate credit rating on Sweden-based leisure product manufacturer Dometic Group AB to 'BB' from 'BB-'. The outlook is stable.

At the same time, we raised our issue rating on Dometic's Swedish krone (SEK)5.8 billion senior unsecured bank facilities to 'BB' from 'BB-'. The recovery rating on these facilities is unchanged at '3', indicating our expectation of recovery in the lower half of the 50%-70% range.

The upgrade reflects our expectation that Dometic's improved margins should be sustainable and also assumes continued healthy sales growth during 2016-2017, based on favorable markets. We note positively the company's focus on operating efficiency and focus on aftermarket sales. We expect this to lead to continuous improvements in credit ratios, and we now expect FFO to debt to remain above 30% over the coming years.

Dometic has successfully delivered its financial policy since its IPO on the Stockholm stock exchange in November 2015, targeting net debt to EBITDA of about 2x, and significantly strengthening its creditworthiness. In addition, private-equity group EQT Partners, which we regard as a financial sponsor, has, as anticipated, continued to reduce its shareholding in Dometic to approximately 27%. As a result, we no longer consider Dometic to be controlled by a financial sponsor, which in our view further reduces the risk of re-leveraging.

We expect credit ratios to continue to improve over the coming years, and we have revised our base case upward following the company's strong trading in 2016. Dometic has continued to grow ahead of the underlying market, driven by a strong product pipeline and growing aftermarket sales, combined with improvements in profitability, which, in our view, should be sustainable. We expect the EBITDA margin to be 16%-17% in 2016, compared with about 14% in 2014. We now forecast that the company will generate FFO to debt of 35%-37% in 2016, and debt to EBITDA of 2.0x-2.2x. On the negative side, we view Dometic's dividend policy as aggressive, since it aims to distribute at least 40% of the previous year's net income, which could lead to substantial cash outflows in coming years. However, we expect the company's discretionary cash flow to debt to remain above 10%, a level we consider in line with the current rating.

In the U. S., a class-action complaint has been filed against Dometic. The future cash flow impact, if any, is highly uncertain at this stage, but in our base case, we assume that it can be managed without affecting the rating.

In our view, Dometic's business risk profile is constrained by the group's moderate size and diversification compared with similar rated peers. We believe Dometic has generally high concentration in mature markets. About 85% of revenue stems from Europe and North America. In addition, Dometic's end markets are cyclical and rely on consumer spending, which is subject to general economic conditions.

These constraints are only partly offset by Dometic's leading positions in its niche markets, strong relationships with original equipment manufacturers, and its good product offering. We expect the group to continue to benefit from its growing share of more stable aftermarket sales. These factors translate into solid operating margins and cash flow, which are key factors supporting the rating.

The stable outlook reflects our expectation that Dometic should continue to generate positive discretionary cash flow and maintain solid profitability, while it expands the business. We expect FFO to debt to remain sustainably above 30% over 2017-2018.

Upside rating potential is limited, but we could consider raising the ratings if Dometic builds a longer track record, with FFO to debt of about 45% and, at the same time, discretionary cash flow to debt remaining above 15%, even in a downturn. We currently do not expect this scenario in the short term.

We could lower the rating if an unexpectedly sharp economic downturn in Europe or U. S. were to occur, or if operating issues appeared, squeezing the EBITDA margin. A ratio of FFO to debt below 30% could lead to a downgrade. Larger-than-expected dividends, leading to discretionary cash flow to debt below 10% or large debt-funded acquisitions could also lead to a downgrade, if, in our view, they would lead to weakened metrics without the prospect of rapid recovery.