Standard & Poor's assigns 'B-' rating to Monier Group; outlook stable

-- Luxembourg-registered building materials manufacturer Monier Group S.a.r.l (Monier) has announced plans to refinance substantial debt maturities due in 2015. These plans include the issue of EUR250 million senior secured notes due in 2019 through a special purpose financing entity, Monier Bond Finance & Co. S.C.A.

-- We are assigning our 'B-' long-term corporate credit rating to Monier.

-- We are also assigning our 'B-' issue rating to the proposed EUR250 million senior secured notes due in 2019.

-- The stable outlook reflects our view of the group's 'adequate' liquidity position under our criteria.

Rating Action

On April 30, 2012, Standard & Poor's Ratings Services assigned its 'B-' long-term credit rating to Luxembourg-registered building materials manufacturer Monier Group S.a.r.l (Monier). The outlook is stable.

At the same time, we assigned our 'B-' issue rating to the proposed EUR250 million senior secured notes due 2019, to be issued by Monier Bond Finance & Co S.C.A. (Monier Bond Finance; not rated), an orphan special-purpose vehicle (SPV).

Monier will use the proceeds of the notes to refinance its existing senior secured debt through a back-to-back loan (Facility E, a new tranche under the Credit Agreement). We assigned a recovery rating of '4' to the back-to-back loan, reflecting average (30%-50%) recovery prospects for the senior secured noteholders in an event of default.

In addition, we assigned our 'B+' issue rating to the new proposed EUR150 million super senior revolving credit facility (RCF) due 2017, to be issued by Monier. The new super senior RCF has a recovery rating of '1', indicating our expectation of very high (100%-90%) recovery in the event of a payment default.

Finally, we assigned our 'B-' issue ratings to the EUR54.2 million nonextended senior secured facilities due 2015 and the EUR378.3 million extended senior secured facilities due 2017. The recovery rating on these facilities is '4', indicating our expectation of average (30%-50%) recovery for senior secured lenders in the event of a payment default.

Rationale

The assignment of ratings follows Monier's announcement of plans to refinance substantial debt maturities due 2015. These plans include the issue of EUR250 million senior secured notes due 2019 through a special purpose financing entity, Monier Bond Finance.

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

Monier's adjusted debt at the end of 2011 includes:

-- 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;

-- Our estimate of EUR285 million of debt adjustments 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.

In our view, continued difficult trading conditions in many of the markets in which Monier is active does not allow for significant organic deleveraging. Our base-case sector and issuer forecasts estimate a broadly flat performance in 2012. This, along with likely increased cash interest payable (if the proposed refinancing plan is successfully implemented) will result in limited free operating cash flow generation. We believe that negative free operating cash flow generation makes an improvement in credit metrics unlikely. Our base-case forecast anticipates that the group's adjusted FFO to debt will decline to about 4% (8.4% excluding the MCPECs and the purchaser's loan) for the financial year ending Dec. 31, 2012, compared to 5.8% (12.5%) in financial year 2011. We forecast the group's adjusted debt to EBITDA to be about 13x (6.3x excluding MCPECs and the purchaser's loan) for financial year 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 control. In line with 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 the end of December 2011 was EUR233 million, of which we believe about EUR50 million is required for operations and an additional EUR8 million is restricted. Under the refinancing plan, Monier will replace its currently undrawn EUR150 million super-senior RCF, (EUR45 million of which matures in 2012, and EUR105 million of which matures in 2014) with a new EUR150 million super-senior RCF, which will have tenor of 4.75 years.

Considering these sources along with FFO of about EUR58 million in financial 2012, we believe that Monier's liquidity sources can comfortably cover estimated cash uses months 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. That said, our base-case scenario does not forecast any free operating cash flow generation over the next two years. In our view, this presents a rating constraint.

Through its announced refinancing plan, Monier will effectively extend the maturity of EUR600 million of its outstanding EUR683 million senior reinstated debt, which matures in April 2015. This will spread the maturity over a period of seven years, with approximately EUR54.2 million maturing in 2015, EUR378.3 million maturing in 2017, and a further EUR250 million maturing in 2019. While we generally view the extended maturity as positive for the rating, we also note the likely meaningful increase in the cash interest payments. Our base-case scenario assumes unadjusted cash interest coverage of more than 3.0x.

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 understand that these covenants will be reset as part of the refinancing plan and will be set to allow for covenant headroom of at least 20%, which is in line with our 'adequate' liquidity qualifier.

Recovery analysis

The issue rating on the proposed EUR250 million senior secured notes due 2019, to be issued by Monier Bond Finance, an orphan SPV, is 'B-', in line with the 'B-' long-term corporate credit rating on Monier. There is no recovery rating on the proposed notes because we do not assign recovery ratings to notes issued by SPVs.

Monier will use the proceeds of the notes to refinance its existing senior secured debt through a back-to-back loan. The recovery rating on this back-to-back loan is '4', reflecting average (30%-50%) recovery prospects for the senior secured noteholders in the event of a payment default.

The issue rating on the new EUR150 million super-senior RCF due 2017, to be issued by Monier, is 'B+', two notches above the corporate credit rating on Monier. The recovery rating on this RCF is '1', indicating our expectation of very high (100%-90%) recovery in the event of a payment default.

The issue ratings on the EUR54.2 million nonextended senior secured facilities due 2015 and the EUR378.3 million extended senior secured facilities due 2017 are 'B-', in line with the corporate credit rating on Monier. The recovery rating on these facilities is '4', indicating our expectation of average (30%-50%) recovery for senior secured lenders 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.

Source LSE London South East