S&P: Sequa Corp. Downgraded To 'CCC' On Large Upcoming Debt Maturities, Outlook Negative
At the same time, we lowered our issue-level ratings on the company's senior secured credit facility to 'CCC-' from 'CCC+' and revised our recovery rating on the facility to '5' from '4'. The '5' recovery rating indicates our expectation for modest (10%-30%; higher end of the range) recovery in a payment default scenario.
In addition, we lowered our issue-level rating on the company's unsecured debt to 'CC' from 'CCC-'. The '6' recovery rating remains unchanged, indicating our expectation for negligible recovery (0%-10%) in a payment default scenario.
"The downgrade reflects our belief that, despite some improvement in the company's still very weak credit metrics in the first half of 2016, Sequa's near-term financial commitments are unsustainable given its large upcoming maturities and continued negative free cash flow generation," said S&P Global credit analyst Tennille Lopez. The company's $1.3 billion term loan matures on June 19, 2017, and its $350 million of senior unsecured notes mature on Dec. 15, 2017. In addition, due to an amendment the company made to its credit facility in March 2016, the availability under its revolver will be reduced to $165 million on Sept. 30, 2016, and $145 million on Dec. 31, 2016, before the commitment is reduced to just the value of the company's outstanding letters of credit by May 5, 2017, constraining its liquidity. We believe the Sequa's very weak credit metrics could make refinancing its debt difficult, which could lead the company to pursue what we would consider a distressed exchange to address its upcoming maturities.
The negative outlook on Sequa reflects our belief that the company will likely face a near-term liquidity crisis or choose to undertake a distressed exchange offer or redemption in the next 12 months. Despite our expectation that the company's credit measures will improve modestly as its revenue increases and it begins to realize some of the benefits from management's cost-cutting initiatives, we still anticipate that its credit metrics will remain weak and are uncertain if the expected improvements will be sustainable. We also do not expect Sequa to generate positive free cash flow during the next 12 months.
We could lower our ratings on Sequa to 'CCC-' if a default, distressed exchange, or redemption appears to be inevitable in the next six months, absent unanticipated and significantly favorable changes in the issuer's circumstances. Alternatively, we could lower our ratings on Sequa to 'CC' if the company announces its intention to undertake an exchange offer or a similar restructuring that we classify as distressed but has not yet completed the transaction.
We could raise our ratings on Sequa if the company is able to refinance its debt and push out its debt maturities, or if it makes an exchange offer to its debtholders that we do not consider a distressed exchange.