Fitch Ratings has lowered its rating on Harsco Corporation's (Harsco)
long-term Issuer Default Rating (IDR) to 'BB' from 'BB+', the secured
revolver and term loan to 'BB+/RR1' from 'BBB-/RR1', and the senior
unsecured notes to 'BB/RR4' from 'BB+/RR4'.
At the same time, Fitch has removed the ratings from Negative Watch,
where they were placed in November 2015. Harsco had $911 million of debt
outstanding as of Dec. 31, 2015. The Rating Outlook is Negative. A full
list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The downgrade reflects weak results in Harsco's metals and mining (M&M)
and industrial businesses, and the resulting pressure on the company's
credit metrics. Fitch expects further deterioration in 2016, though the
suspension of the dividend will support liquidity going forward. The
'BB' IDR reflects Harsco's credit profile given its current business mix
and is the highest likely rating outcome should the company separate its
M&M business, as it intends to do.
The removal from Rating Watch Negative reflects the expectation that a
separation of the metals and mining business will take some time, having
been slowed by weak market conditions (end markets and credit markets),
and that it likely won't occur this year. In addition, Fitch expects the
ultimate rating outcome would be in the mid to low-'BB' range.
The Negative Outlook reflects continued negative business trends as well
as the potential separation of the M&M business. A separation, 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 one-third of
profitability in 2015. In addition, there is some uncertainty around the
ultimate capital structure and financial policies of the remaining
Harsco.
Assuming a separation occurs, Harsco's business would be composed of the
Rail and Industrials segments and a minority interest in the Brand joint
venture. These segments, while posting weak results in 2015, are viewed
by Fitch as having better growth and margin prospects than the M&M
business longer-term.
The M&M segment (36.5% of 2015 operating earnings) was hurt in 2015 by
foreign exchange translation, lower customer steel production and lower
nickel-related sales. In addition, the company exited certain contracts
as it works to improve upon persistently weak operating margins. Sales
in the M&M segment declined by 19.7% in 2015 and are expected to be down
in the high teens again in 2016. The segment operating margin narrowed
in 2015 to 5.6% from 6.7% in 2014 and is expected to be stable to up
slightly in 2016 as a result of the company's restructuring activities.
Sales in the industrial segment (33.5% of operating earnings) declined
13.5% in 2015 due to lower demand for heat exchangers used in natural
gas processing. Operating margins improved in 2015 to 16% from 15.5%.
However, sales and operating earnings are expected to be off sharply in
2016 due to weakness in oil and gas markets.
The rail segment (29.9%) experienced a 5.8% sales decline in 2015, but
will benefit over the next few years from a new contract with Swiss
Rail, offsetting weak rail markets in North America. A margin recovery
is not expected before 2017.
Lower EBITDA and higher debt levels caused Harsco's credit metrics to
weaken in 2015. Debt/EBITDA increased to 3.2x from 2.6x at the end of
2015, while EBITDA/interest narrowed to 6.3x from 7.5x. Assuming the
Harsco business remains in its current form and the M&M is not
separated, Fitch expects debt/EBITDA will increase further to the
high-3x range in 2016 before gradually improving in 2017 and beyond.
Positive FCF following suspension of the dividend will permit modest
debt reduction going forward. The suspension of the dividend will save
the company $66 million annually and result in FCF after dividends in
the $50-60 million range in 2016 compared with negative $72 million in
2015.
Harsco amended its $500 million unsecured credit facility in December
2015, resulting in a $600 million secured facility composed of a $350
million revolver and a $250 million term loan A, both of which mature in
June 2019. The collateral backing the facilities includes the capital
stock of each direct subsidiary (65% of stock of foreign subs) and
substantially all of the company's tangible and intangible assets. In
addition, all of the company's domestic, wholly owned restricted
subsidiaries guarantee the facilities. The proceeds from the term loan
were used to repay borrowings on the revolver.
The ratings and Outlook incorporate:
--Ongoing cost-reduction actions, particularly in M&M, should mitigate a
portion of the impact of weak sales on profitability
--Better growth prospects in the rail segment due to the contract with
Swiss Rail
--Positive FCF following suspension of dividend
Concerns include Harsco's:
--Continued soft results across all three segments in 2016, with
particular weakness in the industrial segment due to its exposure to oil
and gas markets
--Subdued top-line growth prospects in M&M due to low global steel
production, sales declines from exiting underperforming contracts and
weak commodity prices
--Large customer concentrations in M&M segment, and associated risk of
bad debts from distressed steel mills
--Sustained higher total leverage given lower profitability
KEY ASSUMPTIONS
--Sales decline by around 16% in 2016, due to weakness in the M&M and
industrial segments
--The EBITDA margin is down only slightly in 2016 from 16.3% in 2015,
supported by the company's restructuring activities
--Debt levels are reduced modestly with FCF
--FCF improves to $50-60 million due to the suspension of the dividend
--Debt/EBITDA increases to the high-3x range from 3.2x in 2015
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a
negative rating action include:
--The separation of the M&M business, given the resulting reduced scale
and diversification. The ultimate rating impact of a separation would
depend on the proceeds received and the extent to which they are used
for debt reduction.
--Fitch expectation that debt/EBITDA will remain above 3-3.5x, and FFO
adjusted leverage remain above 4-4.5x. These levels would likely be
reset following a separation of the M&M business.
--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 year-end 2015 is supported by cash of $79.8
million, of which $78.3 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 $140.6 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 with its $449
million of 5.75% senior unsecured notes that mature on May 15, 2018. The
revolver and $250 million secured term loan A 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 downgrades Dover Corporation's ratings as follows:
--Long-term IDR to 'BB' from 'BB+';
--Senior secured RCF to 'BB+/RR1' from 'BBB-/RR1';
--Senior secured term loan to 'BB+/RR1' from 'BBB-/RR1';
--Senior unsecured debt to 'BB/RR4' from 'BB+/RR4';
The ratings are removed from Rating Watch Negative. The Rating Outlook
is Negative.
Date of Relevant Rating Committee: March 28, 2015
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/creditdesk/reports/report_frame.cfm?rpt_id=869362
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1001632
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001632
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF
THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE
RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR
RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY
CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH
WEBSITE.
View source version on businesswire.com: http://www.businesswire.com/news/home/20160329006333/en/
Copyright Business Wire 2016
