September 19, 2016 - 10:16 AM EDT
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Fitch Affirms Harsco Corporation's IDR at 'BB'; Outlook Revised to Stable

Fitch Ratings has affirmed Harsco Corporation's (Harsco) Long-Term Issuer Default Rating (IDR) at 'BB' and secured revolver and term loan at 'BB+/RR1'. Fitch has also affirmed Harsco's senior unsecured notes at 'BB/RR4'.The Rating Outlook has been revised to Stable from Negative.

The Outlook revision follows Harsco's announcement that it has sold its 26% interest in Brand Energy & Infrastructure Services, Inc. (Brand) for net proceeds of $145 million, with the proceeds to be used for debt reduction. Harsco had $878 million of debt outstanding as of June 30, 2016.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Outlook revision to Stable reflects expected debt reduction with the proceeds from the sale of the company's interest in Brand and from FCF, which has turned positive in 2016. Fitch expects Harsco will continue to control costs and maintain a disciplined cash deployment strategy, evidenced by its suspension of its dividend and commitment to reduce financial leverage.

The Rating Outlook also reflects Fitch's expectation that Harsco's results will not weaken materially from current levels as a result of ongoing restructuring efforts in the M&M segment, offsetting ongoing weakness in the rail and industrial segments. Fitch recognizes the continuing uncertainty surrounding Harsco's long-term operating strategy and the risk that weakness in its end-markets may be protracted.

The metals and minerals (M&M) segment (64% of 2015 revenues) reported a 17% revenue decline in the first half of 2016, due primarily to site exits, but higher operating earnings as a result of restructuring actions. While business conditions remain weak, earnings from this segment are beginning to show signs of stabilization.

Sales in the industrial segment (21% of sales) declined 33% in the first half of 2016 and margins contracted by more than 500bps due to sharply lower demand for heat exchangers used in natural gas processing. At the same time, the rail segment (15% of sales) experienced a 15% sales decline and sharply lower margins in the first half reflecting weak rail markets in North America. In addition, the company took a $40 million charge in the half for anticipated losses on two contracts with the Swiss National Railway.

FCF has turned positive as a result of the suspension of the dividend, which saves $66 million annually, and a reduction in capex. Fitch expects FCF after dividends will be in the $70 - 80 million range in 2016 compared with negative $72 million in 2015, and that this cash flow will be used for debt reduction. Fitch expects Harsco will maintain positive FCF going forward. In addition, sale of the stake in the Brand joint venture (JV) will save Harsco $22 million in optional annual payments to its partner in the JV and save $8 million in annual pension payments.

Fitch expects debt/EBITDA will improve from 3.3x at mid-2016 to below 3x at the end of 2016 due to the repayment of around $200 million of debt from the Brand sale proceeds and FCF, offsetting lower EBITDA. Fitch expects the company will maintain leverage at below 3x going forward.

Harsco announced in November 2015 that it is exploring strategic options for a separation of its metals and minerals (M&M) segment. Fitch expects that a separation of the metals and mining business will take some time, having been slowed by weak market conditions, and that it likely won't occur in the near-term. Fitch expects the ultimate rating outcome for Harsco following a separation would be in the 'BB' range depending on the proceeds received and the extent to which they are used for debt reduction.

A separation of the M&M segment, either in the form of a sale or a spin-off, would reduce the diversification and scale of Harsco's operations, which are already relatively small, as the M&M segment represents roughly two-thirds of revenues and three-quarters of EBITDA in the LTM period. Assuming a separation occurs, Harsco's business would be composed of the rail and industrial segments which are currently posting weak results but generate better margins than the M&M business and should have good growth prospects longer-term when the oil and gas and U.S. rail markets recover.

KEY ASSUMPTIONS

--Sales decline by around 16% in 2016, due to weakness in all three segments;

--The EBITDA margin recovers to around 17.5% from 16.3% in 2015, supported by the company's restructuring activities;

--Debt levels are reduced by around $200 million with the Brand sale proceeds and FCF;

--FCF improves to $70 - 80 million due to the suspension of the dividend;

--Debt/EBITDA improves to below 3x from 3.2x at the end of 2015.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include the following:

--Separation of the M&M business, given the resulting reduced scale and diversification;

--Fitch's expectation that debt/EBITDA will remain above 3x - 3.5x and FFO adjusted leverage remain above 4x - 4.5x;

--FCF turns negative on a sustained basis.

The ratings are unlikely to be upgraded in the medium-term. Longer-term, developments that may, individually or collectively, lead to a positive rating action include:

--The company either retains the M&M business or the remaining business develops into a larger, more diversified operation;

--Stronger FCF generation;

--Debt/EBITDA is sustained under 2.5x, and FFO adjusted leverage under 3.5x.

LIQUIDITY

Harsco's liquidity at June 30, 2016 is supported by cash of $69.2 million, of which $67.5 million was held overseas, but could be remitted to the U.S. with minimal tax implications. Liquidity is further supported by a $350 million secured revolver, on which $154.5 million was available. Liquidity is also supported by FCF, which Fitch expects will turn positive in 2016.

Harsco faces some refinancing risk over the medium term as $449 million of unsecured notes mature on May 15, 2018. The secured revolver and term loan both mature in June 2019, but the maturity date on these facilities accelerates to 91 days before May 15, 2018 if the notes have not been repaid by that date.

FULL LIST OF RATING ACTIONS

Fitch affirms Harsco Corporation's ratings as follows:

--Long-Term IDR at 'BB';

--Senior secured RCF at 'BB+/RR1';

--Senior secured term loan at 'BB+/RR1';

--Senior unsecured debt at 'BB/RR4';

The Rating Outlook has been revised to Stable from Negative.

Date of Relevant Rating Committee: Sept. 16, 2016

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/site/re/869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)
https://www.fitchratings.com/site/re/879564

Additional Disclosures

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011868

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Fitch Ratings
Primary Analyst:
Philip Zahn, +1-312-606-2336
Senior Director
Fitch Ratings, Inc.
70 West Madison St.
Chicago, IL 60602
or
Secondary Analyst:
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson:
Bill Densmore, +1-312-368-3125
Senior Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
[email protected]


Source: Business Wire (September 19, 2016 - 10:16 AM EDT)

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