S&P: Accudyne Industries Borrower S. C.A. Outlook Revised To Negative On Challenging End-Market Conditions; Ratings Affirmed
At the same time, we affirmed our 'B' issue-level ratings on the company senior secured credit facilities. The '2' recovery ratings on the facilities remain unchanged, indicating our expectation for meaningful (70%-90%; lower end of the range) recovery in the event of a default.
Additionally, we affirmed our 'CCC' issue-level rating on the company's senior unsecured debt. The '6' recovery rating on the unsecured debt remains unchanged, indicating our expectation for negligible (0%-10%) recovery in the event of a default.
"The outlook revision reflects Accudyne's weaker-than-expected operating performance in the second quarter of 2016, which has left the company with very high debt leverage and negative free cash generation," said S&P Global credit analyst Steven Mcdonald. We had previously expected that the company would reduce its leverage in 2016; however, persistently low oil prices, challenging operating conditions in China, and a stronger U. S. dollar have further pressured its EBITDA, leading it to maintain a very high adjusted debt-to-EBITDA metric of more than 11.0x as June 30, 2016. Because of these declining trends in the company's operating performance, along with our expectation that any recovery will be slow, we have revised our base-case forecast. We now estimate that the company's debt-to-EBITDA metric will be more than 10.5x in 2016 before modestly improving to about 9.5x in 2017.
The negative outlook on Accudyne reflects the potential that we may lower our ratings over the next 12 months if the company is unable to improve its operating performance, generate positive free cash flow, and strengthen its weak credit metrics. A failure to materially improve its performance could occur due to further end-market deterioration, continued delays in customer orders, or missteps in the execution of productivity initiatives, any of which would undermine the company's deleveraging prospects.
We could lower our ratings on Accudyne if its leverage increases further or if the company is unable to generate meaningful positive free cash flow over the next few quarters.
We could revise outlook on Accudyne to stable if the company is able to reduce its leverage from current levels and we see prospects for further improvement. We would also expect the company to maintain adequate liquidity and presume that there would be ongoing prospects for recovery in its end markets.