(The following statement was released by the rating agency)Overview
-- Kennesaw, Ga.-based Brand Energy & Infrastructure Services (Brand)plans to issue a new $325 million senior secured second-lien credit facility.
-- Brand will use this, along with the previously announced first-lienterm loan and existing cash, to refinance all of its existing debt.
-- We are assigning our issue-level rating of 'CCC+' to the company'sproposed $325 million second-lien term loan facility.
-- The stable outlook reflects our expectation for Brand's leverage toimprove to about 6x over the next 12 months and that the financing will becompleted.
Rating ActionOn Oct. 11, 2012, Standard & Poor's Ratings Services assigned its 'CCC+' issuerating and '6' recovery rating (indicating our expectation of negligible[0%-10%] recovery in the event of payment default) to Brand Energy &Infrastructure Services' proposed $325 million second-lien term loan. Our 'B'corporate credit rating and stable outlook on Brand remain unchanged.
At the same time we revised our recovery rating on the proposed first-lienterm loan and revolving credit facility to '3' from '4' as a result of agreater pledge to the first-lien lenders from the company's Canadiansubsidiary (Aluma Systems Inc., which is now a borrower under a $150 millionfirst-lien term loan tranche). The '3' recovery rating indicates ourexpectation of meaningful (50%-70%) recovery. Brand is the borrower of theproposed first-lien $75 million revolver and first-lien $550 million term loanfacility. The 'B' issue-level ratings on all these facilities remainunchanged. Our 'BB-' issue rating and '1' recovery rating (very high recoveryof 90%-100%) on Brand's $50 million first-lien letter-of-credit facility alsoremain unchanged.
All ratings are subject to a review of final documentation.
The ratings on Brand reflect our view of the company's "highly leveraged"financial profile and "weak" business profile. The stable outlook indicatesour expectation for sustained low double-digit EBITDA margins on slow demandrecovery in its end-markets, our expectation leverage will fall to about 6xover the next 12 months, and that its proposed refinancing extends maturitieson all of its existing debt. Our financial risk assessment reflects Brand'shigh leverage and modest cash flow generation prospects over the next twoyears, and the overall business risk assessment reflects its exposure tovolatile end-markets and competitive pricing.
We expect Brand to remain one of the largest providers of work access (i.e.,scaffolding) and multicraft services in North America, with customersprimarily in the energy sector--in particular, refineries--and, to a lesserextent, utilities. Although some of its end markets are cyclical, maintenanceservices (roughly two-thirds of revenues) tend to be more resilient torecessions. Contract terms between three and five years (although customerscan cancel these on a relatively short notice) should continue to provide someearnings stability. Brand also has a commercial business, which is moreproject-focused, less recurrent, and accounts for only about 8%-10% ofrevenues.
After being delayed during the economic downturn, maintenance and plantturnaround activity is slowly picking up across Brand's end markets. We expectdemand for maintenance services in Brand's energy and industrial markets tomodestly grow, at least in line with U.S. GDP, and for pricing to remaincompetitive. Brand's EBITDA margins have been improving over the past fewquarters after they weakened as a result of price concessions that the companyoffered in response to competitive pressures. Also, some customers delayedmaintenance capital expenditures over the past downturn. Given someimprovement in demand, where possible, Brand has renegotiated some of itscontracts, which we will continue to monitor with respect to our base-caseassumptions for its operating performance over the next two years.
Our base case scenario assumptions for Brand include:
-- Revenue will grow at about a mid-single-digit rate for the remainderof 2012 and 2013 mainly as a result of business wins in 2011 in itspetrochemical end-markets and slow economic recovery driving low growth in itsrefining- and oil sands-related end-markets.
-- EBITDA margins will rise by at least 100 basis points over 2011 levelsto about 10% or more over the next two years (after incorporating ongoingpricing pressure), because of overall sales recovery, absent any meaningfulcontract losses or productivity losses from potentially severe weather.
-- Leverage will improve to about 6x or less over the next two years withlow, but positive, free cash flow generation prospects over the cycle.
We view Brand's financial risk profile as highly leveraged, given pro formaleverage (including our adjustments) of more than 6.5x as of June 30, 2012,and our expectation for leverage to remain above 6x for the next 12 months. Weexpect some gradual improvement, although these metrics will likely remain atthe lower end of our expectations.
For the rating, we expect adjusted debt to EBITDA of about 6x or less and freeoperating cash flow (FOCF) to total debt in the low-single-digit area. Thecompany's liquidity position has improved given it has extended its proposedrevolver maturity to 2017 from February 2013. However, we believe higherinterest expenses following the refinancing will somewhat constrain futurecash flow generation.
We believe Brand has adequate liquidity. Our assessment of Brand's liquidityprofile incorporates the following expectations and assumptions:
-- We expect sources of liquidity, including available cash and fundsfrom operations, to exceed uses by 1.2x or more over the next 12 months;
-- We believe net sources would remain positive even if EBITDA declinesby 15%; and
-- The proposed first-lien credit agreement would contain a first-liennet leverage covenant if the revolver is more than 50% drawn, which we do notexpect in our base case. We expect at least 15% cushion on its first-lien netleverage covenant. The second-lien facility contains no financial covenants.
Liquidity sources as of June 30, 2012, were adequate to cover near-term uses,with roughly $65 million of cash (pro forma) on the balance sheet (including$50 million of restricted cash) and an undrawn $75 million revolving creditfacility (matures 2017) after refinancing. Given the proposed first-lien netleverage ratio requirements, Brand's access to its revolver is no longerlimited to 50% of the $75 million facility, minus outstanding letters ofcredit.
Despite higher interest expenses following the refinancing, we do incorporatebenefit to cash flow from meaningful interest expense savings following therolloff of $525 million of swaps earlier this year and another swap maturityin February 2013. We expect uses of liquidity over the next 12 months toinclude approximately $30 million to $40 million in capital expenditures (netof proceeds from used equipment) and roughly $20 million to $25 million inworking capital.
We believe the proposed refinancing of Brand's existing capital structure hasimproved financial flexibility by extending debt maturities beyond 2015.
Recovery AnalysisFor the complete recovery analysis, see the recovery report on Brand to bepublished on RatingsDirect after this report.
Our stable outlook reflects our expectation for improved financial flexibilitygiven that Brand is extending the maturity on all its existing debt. Also,over the next 12 months we expect Brand to sustain recent improvements inEBITDA margins, given its recent ability to mitigate pricing pressures.Leverage should improve toward 6x, assuming industry activity picks up tohistorical levels, which is likely because customers can only generally delaymaintenance work temporarily.
We could consider a downgrade if the proposed transaction does not close or ifwe believe Brand would not reduce leverage toward 6x or less because ofrenewed pressure on EBITDA margins, leaving it vulnerable to eventualrefinancing risks. A downgrade also could occur if Brand's liquidity profiledeteriorates on end-markets that are weaker than we expect for a prolongedperiod, leading to customers delaying maintenance work over the near term, orif Brand loses maintenance projects altogether.
An upgrade is unlikely over the next 12 months given our expectations forcompany's financial risk profile to remain highly leveraged. Following therecent refinancing of Brand's second-lien debt, we believe the increasedlikelihood that leverage will remain about 5x or less would be a significantfactor for any positive rating action on the company over the next year.
Related Criteria And Research
-- Economic Research: U.S. Economic Forecast: He's Buying A Stairway ToHeaven, Sept. 21, 2012
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings ListRatings Affirmed
Brand Energy & Infrastructure Services
Corporate Credit Rating B/Stable/--
Brand Energy & Infrastructure Services
Senior Secured LOC loan BB-Recovery Rating 1Senior Secured Second Lien CCC+Recovery Rating 6
Ratings Affirmed; Recovery Ratings Revised
To FromSenior Secured Revolver, First Lien B BRecovery Rating 3 4New Rating
Brand Energy & Infrastructure Services
US$325 mil sr secd 2nd lien term due 2019 CCC+
Recovery Rating 6Aluma Systems Inc.Senior Secured
US$150 mil 1st lien term bank ln due 2018 B
Recovery Rating 3
Complete ratings information is available to subscribers of RatingsDirect onthe Global Credit Portal at
. All ratings affectedby this rating action can be found on Standard & Poor's public Web site at. Use the Ratings search box located in the leftcolumn.(New York Ratings Team)