S&P: Elevator Component Maker Wittur Outlook Revised To Neg On Debt Increase, Difficult Operating Conditions; Affirmed At 'B'
We also affirmed our 'B' issue rating on Wittur's €80 million revolving credit facility (RCF) and the €410 million term loan B, including the new €35 million add-on. The recovery rating remains at '3', indicating our expectation of recovery in the lower half of the 50%-70% range.
We affirmed the 'CCC+' issue rating on the €225 million senior notes. The recovery rating on these notes remains at '6', indicating our expectation of recovery in the 0%-10% range.
We revised the outlook on Wittur following its report at the end of the second quarter of 2016 of higher debt than what we had expected. The outlook revision also reflects our downward revision of our forecasts for Wittur's revenue growth and profitability, based on the challenging operating conditions in China and higher-than-previously-expected reorganization costs for the integration of Sematic SpA, which Wittur acquired on April 1, 2016. As a consequence, we now see a risk that--should the group fail to improve its earnings--the company's weakening operating performance, together with the increased debt, could lead to credit ratios not commensurate with our current rating.
Since the closing of the Sematic acquisition, which was financed in line with our expectations, Wittur has increased its debt to finance the costs of integrating Sematic. By June 30, 2016, the RCF had been drawn by €52 million, much higher than the initial €20 million. The amount drawn on the RCF is outside of our previous base case, in which we expected the RCF to stay mostly undrawn after the initial €20 million drawing had been paid down. On July 26, 2016, Wittur announced a €35 million add-on to its existing term loan, and we understand that the proceeds have been used to pay down and increase the availability under the RCF. In total, the Wittur group's current debt is higher than what we previously expected, and we see a risk that the company's operating performance might not recover enough in the near term to compensate for the higher debt burden. The group has experienced weaker-than-expected performance in the first half of 2016, due to challenging conditions in China and negative currency translation effects from the strengthening euro.
We now expect the slowdown in China, representing about 35% of the combined group's sales, to continue to weigh on revenue growth and margins over the medium term, and to offset otherwise solid growth in Europe and other Asian countries. We have revised our forecast and we now expect revenue growth to be flat to slightly positive in 2016 and 2017 before improving in 2018, when the company expects China to be back on a trajectory of growth in new installation. We also see a risk that intensified pricing pressure in China and higher-than-expected reorganization costs for the integration of Sematic could trim margins.
Nevertheless, we expect the group's margins to improve over time, with additional earnings from Sematic, the achievement of planned synergies through continued reorganization over the next two years, and ongoing operational efficiency initiatives. Our credit metrics are based on pro-forma average ratios over 2016 and 2017 to fully reflect the post-acquisition capital structure and combined operations.
The ratings continue to reflect the group's weak business risk profile, which in our view is constrained by the group's concentrated business in terms of scope, end markets, and customers relative to peers. The group's sales exposure to its top four customers is around 65%-70%. Moderating some of these weaknesses is the group's leadership position in its addressable markets, well-established relationships with its key customers, and good geographic diversity.
The negative outlook reflects the increased likelihood that we could downgrade Wittur should the group fail to return profitability over the coming 12 months to levels that enable credit ratios to improve to levels commensurate with the current rating, namely adjusted FFO to debt around 6.5%-7.5%, adjusted debt to EBITDA around 5.5x-6.5x, and adjusted EBITDA interest coverage above 2x.
We could lower the rating if adjusted EBITDA interest coverage falls below 2x and leverage ratios deteriorate outside of our base case, without near-term prospects for recovery. We could also take a negative rating action if liquidity falls below our adequate assessment. These scenarios could materialize in the event of larger contractions in revenue and EBITDA than we currently anticipate, a slower-than-expected recovery in revenue growth and margins, or if synergies are not successfully realized.
We could revise the outlook to stable if Wittur manages to improve its profitability to an extent that EBITDA interest coverage recovers to above 2x. This could result from stronger-than-expected resilience to the slowdown in China, an earlier-than-anticipated upturn in the company's end markets, or improvements in its cost base thanks to greater-than-expected synergies following the integration of Sematic.