OREANDA-NEWS. S&P Global Ratings today affirmed its 'B' corporate credit rating and revised its rating outlook on OMNOVA Solutions Inc. to positive from stable.

At the same time, we assigned our 'B+' issue-level and '2' recovery ratings to OMNOVA's proposed senior secured term loan. The '2' recovery rating indicates our expectation of substantial (low end of the 70% to 90% range) recovery in the event of a payment default.

We will withdraw the issue-level and recovery ratings on OMNOVA's existing debt upon repayment.

"The outlook revision reflects our expectation that OMNOVA will continue to benefit from an improved product mix, ongoing cost-reduction initiatives, and new product introductions, resulting in gradually improving EBITDA margins in the next 12-24 months," said S&P Global Ratings credit analyst Brian Garcia. "As a result, we expect credit measures to gradually improve over the next 12-24 months," he added.

Our newly assigned ratings for the proposed senior secured term reflect our updated recovery analysis, taking into account the changes in the capital structure as a result of the proposed transaction.

The positive outlook on OMNOVA Solutions Inc. reflects our view that the company's credit metrics will continue to improve after the refinancing transaction and a sizeable paydown in debt late in fiscal year 2015. We expect gradually improving margins as a result of the company's continued transition toward its specialty businesses to result in modestly strengthening credit measures over the next 12-24 months. We expect OMNOVA's management will remain prudent in regard to acquisitions and shareholder rewards, thereby maintaining a financial policy that supports the ratings. Based on our scenario forecasts, we expect that EBITDA will gradually increase from fiscal 2015 levels, with weighted average FFO to debt approaching 12%, pro forma for acquisitions.

We could raise the ratings in the next 12 months if EBITDA margins were to improve to a level that would result in credit measures strengthening to within our aggressive band, including FFO to debt above 12% on a sustainable basis, pro forma for acquisitions. This could result if 2016 EBITDA margins exceeded our expectations by 50 basis points or more, coupled with 2016 revenue growth 2% above our projected levels. This could be driven by stronger growth in the company's specialty businesses than we currently expect, or greater benefits from cost-reduction and pricing initiatives than we currently project in our base-case scenario. In order to raise the ratings, we would also expect management to remain prudent in funding acquisitions and shareholder rewards. We would also expect liquidity to remain adequate in our view.

We could revise the outlook to stable over the next 12 months if unexpected business challenges, such as the loss of a key customer, negative effects of volatile input prices (such as butadiene), or an inability to pass on raw material increases in a timely manner, caused EBITDA margins and revenues to remain stagnant or decline. As a result, credit metrics would fail to improve causing FFO to Debt to remain below 12% on a sustainable basis, pro forma for acquisitions. We could also revise the outlook if, against our expectations, cash outlays or financial policy decisions stretch the company's financial profile beyond a level appropriate for the current ratings.