(The following statement was released by the rating agency)
Dec 23 -
-- We are concerned that Sweden-based leisure-product maker Dometic Group AB will be negatively affected by increasingly tough economic conditions and that its covenant headroom will tighten in 2012.
-- We are revising our outlook to negative from stable, while affirming the ratings, including the 'B' long-term corporate credit rating.
-- The negative outlook primarily reflects the potential for covenant breaches in 2012.
Standard & Poor's Ratings Services said today that it had revised its outlook on Sweden-based leisure-product maker Dometic Group AB and subsidiary Dometic Holding AB (together "Dometic" or "the group") to negative. At the same time, we affirmed the 'B' long-term corporate credit rating on both entities.
We also affirmed the 'CCC+' issue rating on EUR202 million payment-in-kind (PIK) notes issued in April 2011 and maturing in 2019. The recovery rating on these notes is '6', reflecting our expectation of negligible (0%-10%) recovery in an event of payment default.
The outlook revision reflects our concerns that the covenant headroom on Dometic's senior facilities will tighten in the face of increasingly tough economic conditions that could pressure sales and margins. Although Dometic's underlying margins have historically proven resilient against swings in demand and have consequently been the main supportive rating factor, the group's very high debt burden makes it sensitive to small changes in profits and cash flow.
Dometic Group AB (formerly Frostbite 1 AB ) is a leading manufacturer of comfort products for the recreational vehicle, automotive, and marine leisure market. It wholly owns Dometic Holding AB. We equalize the business risk and financial risk profiles of both entities. The group underwent a change of ownership and a debt restructuring in May 2011.
In our base-case scenario for 2012, we anticipate that Dometic will experience a decline in revenues of up to 5% which could lead to some pressure on its underlying EBITDA margin which is currently at a healthy 17%-plus. We believe that Dometic's underlying free operating cash flow generation will remain solid, as has been the case over the past 10 years. Due to the group's heavy debt burden, however, we forecast that adjusted funds from operations to debt will stay below 10% and debt to EBITDA at 8x.
The ratings on Dometic are constrained by our view of the group's high leverage, which we believe will keep its financial metrics in a range that we view as "highly leveraged" over the next two-three years. In the group's second and third quarter 2011 reports, a number of post-acquisition adjustments have been made to the financial statement retrospectively. Most of the adjustments are related to non-recurring items connected with the ownership change and debt restructuring. Since May 4, 2011, the reporting company has been Dometic Group AB. Before that, it was Dometic Holding AB.
Further constraints on the ratings include Dometic's high exposure to the cyclical recreational vehicle, automotive, and marine leisure industry, which represents about 85% of revenues. These constraints are reflected in the group's "weak" business risk profile. However, Dometic enjoys leading positions in its niche markets and strong relationships with original equipment manufacturers, which create high entry barriers and give the group pricing power. Dometic has a history of strong cash flow generation, which is also a key supporting rating factor.
The negative outlook primarily reflects the risks associated with deteriorating covenant headroom, which we view as likely during 2012. Given Dometic's highly leveraged capital structure, we would view any covenant breach or minimal covenant headroom as incompatible with the current ratings.
RELATED CRITERIA AND RESEARCH
-- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008