Standard & Poors assigns Monier Group 'B-' long-term rating; outlook stable

-- Luxembourg-registered building materials manufacturer Monier Group has decided to postpone the launch of its proposed EUR250 million senior secured notes due to unfavorable market conditions.

-- We are affirming our 'B-' long-term rating on Monier.

-- We are withdrawing our 'B-' and 'B+' issue ratings on Monier's proposed senior secured notes and super senior revolving credit facility, respectively.

-- Our stable outlook reflects our view of the group's current 'adequate' liquidity position, independent of the proposed bond refinancing.

Rating Action

On May 15, 2012, Standard & Poor's Ratings Services affirmed its 'B-' long-term corporate credit rating on Luxembourg-registered building materials manufacturer Monier Group (Monier). We also affirmed our 'B+' issue rating on the group's existing super senior revolving credit facility (RCF) of EUR150 million and 'B-' issue rating on the EUR650 million senior financing agreement (EUR683 million currently outstanding).

Following Monier's announced decision to postpone its bond placement, we have withdrawn our 'B-' issue rating on the proposed EUR250 million senior secured notes due 2019, which were to be issued by Monier Bond Finance & Co S.C.A. (Monier Bond Finance; not rated), an orphan special-purpose vehicle (SPV). We also withdrew our 'B+' issue rating on the proposed EUR150 million super senior RCF due 2017.

Rationale

The affirmation reflects our view that Monier's liquidity continues to be adequate under our criteria, despite the postponement of the proposed bond placement. This is because the company has no debt maturities over the next two years. Monier's liquidity is also supported by its substantial cash balance, which we consider to be more than sufficient to meet the operating cash needs of the business.

The ratings on Monier reflect our view of the group's 'highly leveraged' financial risk profile and 'fair' business risk profile. In our opinion, the main constraint on the ratings is the group's heavy debt burden. Standard & Poor's-adjusted total debt for Monier stood at EUR1.7 billion at year-end 2011.

Monier's year-end 2011 adjusted debt included:

-- EUR505 million of senior reinstated debt (net of surplus cash of EUR176 million);

-- EUR335 million of a purchaser's loan and EUR10 million of second-lien warrants, issued by Monier Holdings S.C.A. (not rated);

-- EUR594.1 million of Mandatorily Convertible Preference Equity Certificates (MCPECs), which we treat as debt under our criteria;

-- EUR285 million of debt adjustments, on our estimates, relating to operating leases and post-retirement pension obligations; and

-- EUR17 million of adjustments relating to finance leases, derivatives, local loans, and site restoration obligations.

For the financial year ended Dec. 31, 2011, we calculate the group's adjusted funds from operations (FFO) to debt to be about 5.8% (12.5% excluding the MCPECs and the purchaser's loan) and adjusted debt to EBITDA to be about 12.1x (5.6x excluding MCPECs and the purchaser's loan).In our view, continued difficult trading conditions in many of the markets in which Monier is active do not allow for significant organic deleveraging. Our base-case sector and issuer forecasts estimate a broadly flat performance in 2012.

Our assessment of Monier's 'fair' business risk profile includes our view of the industry's highly cyclical and capital-intensive nature, as well as the group's exposure to volatile input costs and significant exposure to the early-cyclical, and still-depressed residential end markets. In part, this is offset by Monier's solid market positions, a degree of product innovation, fair geographic diversity within Europe, and several credit-positive features of the industry. These features include a large share of renovation-led demand, high barriers to entry, the local nature of markets, and moderate substitution risks.

Monier's lenders assumed ownership of the business in 2009, when the group's debt was restructured. Since 2009, we understand the private equity groups Apollo Management International LLP, TowerBrook Capital Partners L.P, and York Capital Management, LLC (together ATY) have launched an offer to increase their stake to gain majority ownership. In line with our approach for other issuers owned by private equity investors, we assess Monier's financial policy as 'aggressive.'

Monier manufactures roofing tiles and related components and chimneys, which it mainly sells through builders' merchants. The company focuses primarily on the European and Asian markets, with 130 production sites in 33 countries. While Monier is exposed to the cyclical residential construction industry, it has substantial revenues (50%) from the renovation sector, which we view as being comparatively more stable.

Liquidity

We view Monier's liquidity as 'adequate' under our criteria. Reported cash on hand at end-December 2011 was EUR233 million, of which we believe about EUR50 million is required for operations and an additional EUR8 million is restricted. Monier currently has an undrawn EUR150 million super senior RCF, including EUR45 million maturing in 2012 and EUR105 million maturing in 2014.

Considering these sources along with positive FFO in financial 2012, we believe that Monier's liquidity sources can comfortably cover estimated cash uses by more than 1.5x, in the absence of any significant short-term financial maturities. Cash uses include capital expenditure, working capital movements, and potential moderate bolt-on acquisitions.

Monier currently has EUR683 million in senior reinstated debt outstanding, which matures in April 2015.

Monier's existing senior facilities have financial maintenance covenants prescribing, among other measures, maximum net debt to EBITDA and minimum EBITDA cash interest coverage. We calculate that Monier will have sufficient headroom under these covenants over the next 12 months.

Recovery analysis

The issue rating on Monier's EUR150 million existing super senior RCF is 'B+', two notches above the corporate credit rating (CCR). The recovery rating on this RCF is '1', reflecting our expectation of very high (90%-100%) recovery in the event of a payment default.

The issue rating on the EUR650 million reinstated senior facilities (of which EUR683 million currently outstanding) is 'B-', in line with the CCR on Monier. The recovery rating on these facilities is '4', reflecting our expectation of average (30%-50%) recovery in the event of a payment default.

We base our recovery prospects on our valuation of Monier as a going concern, underpinned by the value of its assets. We factor in a comprehensive asset security package available to the super senior and senior secured lenders. We believe that recovery prospects could be limited by the multijurisdictional exposure of the business.

The super senior RCF and the senior secured facilities share the same security package. Security is provided over the assets and share pledges of the entities generating at least 85% of EBITDA and total assets. Super senior lenders have a priority claim on enforcement (as per the intercreditor agreement in place).

Monier's assets are located in multiple countries, which in our view could lead to cross-jurisdictional issues and legal restrictions negatively affecting the ultimate value available for creditors in the event of reorganization. We assume that Monier's center of main interests is Germany, which accounted for about 25% of consolidated sales and EBITDA in full-year 2011.

To calculate recoveries, we simulate a hypothetical payment default scenario. We assume a combination of the following:

-- Modest performance in Germany and other Western European countries (Western Europe contributes 68% of revenues), with limited growth in Eastern Europe;

-- The group's weakened ability to pass on cost increases, such as for cement and energy, to its customers on account of flat-to-modest demand in most markets; and

-- The super senior RCF that is fully available on the path to default.

In our opinion, this scenario would lead to significant margin erosion, namely with an EBITDA margin of just less than 9% in the hypothetical year of default, which under these assumptions, we forecast to be 2015, triggered by the company's inability to refinance its EUR683 million reinstated debt.

Our valuation of the business as a going concern is supported by Monier's strong market positions, well-established brands, and geographic diversity, and is underpinned by the value of its total assets.

At the hypothetical point of default, the stressed enterprise value would be about EUR550 million and reduced by priority obligations of an estimated EUR80 million. These obligations comprise enforcement costs, as well as a proportion of unfunded pension liabilities, and the structurally senior bank debt of Monier's subsidiaries. We also assume that the super senior RCF will be used on the path to default. After deducting all these priority claims, we believe that the super senior lenders would recover 90%-100% of the principal and prepetition interest, with lenders of the senior secured reinstated debt achieving recoveries in the 30%-50% range.

Outlook

The stable outlook reflects our view of Monier's 'adequate' liquidity profile, independent of the previously proposed refinancing and its highly leveraged credit

Source London South East