S&P: AI Alabama Midco, Holding Co. Of Dutch Belting Producer Ammeraal Beltech, Outlook Revised To Negative On Increased Debt
At the same time, we affirmed the 'B' issue ratings on AI Alabama's €290 million first-lien term loan B, including the new €85 million add-on, and the €40 million revolving credit facility (RCF), borrowed by AI Alabama B. V. The recovery rating on both remains '3', indicating our expectation of recovery in the lower half of the 50%-70% range.
We also affirmed our 'CCC+' issue rating on the €60 million second lien loan. The recovery rating remains '6', indicating our expectations of negligible (0%-10%) recovery in a default scenario.
The outlook revision follows AI Alabama's new €85 million add-on to its existing term loan B, the proceeds of which it plans to use, together with €11 million from the cash balance, for a distribution to shareholders of €94.3 million and to pay certain fees related to the transaction. This debt increase and accompanying dividend distribution was unexpected and is aggressive, in our view, leading to credit ratios outside of our previous base case for the rating.
We expect the debt increase will result in a debt to EBITDA ratio of about 10.0x-10.5x and funds from operations (FFO) to debt of 2.3%-2.8% for 2016, compared with our previous estimates of debt to EBITDA of 8.5x-9.0x and FFO to debt of 4.0%-4.5%. We now forecast the ratio FFO cash interest coverage ratio will deteriorate to about 2.8x, from about 4.0x. Should the company fail to significantly improve its EBITDA margin in line or above our expectations over the next 12 months to compensate for the higher debt burden, this could lead us to downgrade AI Alabama. This could occur if the company would incur any further material restructuring costs or fail to realize the expected cost savings. Any material debt financed acquisition could also lead to rating pressure at this time.
On the positive side, we notice that the company experienced strong revenue growth over the last year, and took several cost-saving initiatives. Our adjusted EBITDA has therefore been negatively impacted by restructuring costs of €15 million over the last year. We believe the company has now fully implemented its cost-efficiency program and we do not expect any further material restructuring going forward. We expect that this together with cost saving should lead to an improvement in margins and credit ratios over the coming year, which should support credit ratios.
The negative outlook reflects the increased likelihood that we could downgrade AI Alabama should the company fail to improve profitability over the coming 12 months to levels that support credit ratios that are commensurate with the current rating.
We could lower the ratings if the company fails to improve its profitability over the outlook horizon and improve its adjusted credit ratios. This includes our anticipation that the company should be able to improve its S&P Global Ratings' adjusted EBITDA margin of about 14.5% in 2016 to about 18% in 2017, with continued positive free cash flow generation. Rating-commensurate credit measures also include FFO cash interest coverage above 2.5x. We could also take a negative rating action if liquidity is not maintained in line with our adequate assessment. These scenarios could materialize if the company fails to significantly improve its EBITDA margin over the next 12 months, which could occur if it incurs any further material restructuring costs or fails to realize expected cost savings. We could also lower the ratings if the financial sponsor takes further aggressive actions or the company makes any additional material debt-financed acquisitions.
We could revise the outlook to stable if AI Alabama manages to significantly improve its profitability over the near term, to an extent that supports credit ratios commensurate with the current rating.