(The following statement was released by the rating agency)
Oct 08 - Overview
-- We think that tougher economic conditions in the remainder of 2012 and in 2013 could lead to further tightening of already tight covenant headroom and potential pressure on liquidity for Sweden-based leisure-product maker Dometic Group .
-- We are lowering our rating on Dometic to 'B-' from 'B' and the issue rating on Dometic's EUR202 million PIK note to 'CCC' from 'CCC+'.
-- The negative outlook reflects our concerns that Dometic will face further tightening of covenant headroom and pressure on liquidity in the continued weakening European economy.
Rating Action
On Oct. 8, 2012, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Sweden-based Dometic Group AB and its wholly owned subsidiary Dometic Holding AB to 'B-' from 'B'. The outlook is negative. At the same time, we lowered the issue rating on Dometic's EUR202 million payment-in-kind (PIK) notes to 'CCC' from 'CCC+'. The recovery rating on these notes is '6', reflecting our expectation of negligible (0%-10%) recovery in an event of payment default.
Rationale
The downgrade reflects the current tight covenant headroom under Dometic's senior term loan facilities, which we expect to tighten even further in the remainder of 2012. We expect a weakening European economy to put further pressure on Dometic's liquidity in 2012-2013, which may in turn lead to a breach of bank loan covenants. We believe that Dometic's covenant headroom could be at the lower end of our definition of "tight" (5%-15%) by year-end 2012. We also note that Dometic's senior management has changed several times over a short period, which is also a concern, given the tight financial headroom.
Although Dometic's underlying margins have historically proven fairly 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. As Dometic has a total of about Swedish krona (SEK) 1 billion (Approximately EUR115 million) yearly of interest payments and amortizations, and about SEK200 million of capital expenditures, even a smaller decline in the current rolling 12 months' EBITDA of SEK1.3 billion could lead to tighter liquidity.