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Rating Action:

Moody's changes Eco-Bat's outlook to negative from stable (Ba3 CFR)

Global Credit Research - 08 May 2013

London, 08 May 2013 -- Moody's Investors Service today changed the outlook on Eco-Bat Technologies Limited's ratings (Eco-Bat) to negative from stable (Ba3 CFR). The outlook change reflects Moody's view that, after a challenging 2012, Eco-Bat's operating performance could remain under significant pressure in 2013. In addition, event risk from the large pay-in-kind (PIK) note at Eco-Bat's parent increases as the PIK continues to accrue interest. Concurrently, Moody's affirms the Ba3 corporate family rating (CFR), Ba3-PD probability of default rating (PDR) and B1 rating for the 2017 senior notes issued by Eco-Bat Finance plc.

RATINGS RATIONALE

Eco-Bat's operating performance is under significant pressure. After a strong operating performance in 2011, Eco-Bat experienced a much more challenging environment in 2012 including a decline in revenues by 6.5% and EBITDA by 38% on the back of reduced average lead prices (-14%). Raw material costs, which mainly refer to scrap batteries that are collected from recycling yards, distributors or directly from customers, remained high due to a very mild winter in early 2012 that led to reduced battery failures but also a more structural trend of increasing scrap prices relative to lead over recent years.

In addition, customers mainly comprise a limited number of battery manufacturers, creating a high degree of customer concentration for Eco-Bat, which pressures pricing power in a competitive industry. Decisions taken by Johnson Controls, Inc. (Baa1, stable), a large battery manufacturer and important customer of Eco-Bat (at about 25% of 2012 revenues), to increase in-house smelting capacity in the US at the expense of independent smelters such as Eco-Bat is further elevating competition. Legal disputes further highlight the challenging relationship in the US between Eco-Bat and its largest customer. The volume and price impact from Johnson Controls, Inc's. new smelting capacity will only impact Eco-Bat fully in 2013 as this new capacity ramps up. Moody's also notes the EU inspections carried out September 2012 in relation to competition issues at several scrap battery purchasers which adds further uncertainty for the industry. As these factors conspire in 2013, Eco-Bat's operating performance could remain under significant pressure for the year.

Eco-Bat's ratings are also under increasing pressure from the large (PIK) note issued by a holding company above the restricted group of the 2017 senior notes. In Moody's view, event risk related to the PIK note is increasing as it accretes towards €1.8 billion at maturity in March 2017, a few days after the maturity of the 2017 senior notes. Certain outcomes at the shareholder level, including a change of control following a default of the PIK, may also affect the restricted group. The existing significant capacity to pay dividends at restricted group level -- about GBP390 million at December 2012 - provides additional uncertainty. Accordingly, this unusually top-heavy debt structure exerts pressure despite the PIK's lack of any debt claim into the restricted group.

Moody's considers the prospect for near-term upward rating migration to be limited in the context of the above considerations. A prerequisite for upward rating pressure is greater certainty that Eco-Bat's resources will not ultimately be used to support the PIK note.

Downward rating pressure could increase if Eco-Bat's operating performance and credit metrics remain weak in 2013 e.g. if (adjusted) EBITDA margins remain below 10%. The ratings will also come under further negative pressure as the PIK note continues to grow over time and approaches maturity; or following any material debt-funded acquisition.

Eco-Bat Technologies Ltd.'s ratings were assigned by evaluating factors that Moody's considers relevant to the credit profile of the issuer, such as the company's (i) business risk and competitive position compared with others within the industry; (ii) capital structure and financial risk; (iii) projected performance over the near to intermediate term; and (iv) management's track record and tolerance for risk. Moody's compared these attributes against other issuers both within and outside Eco-Bat Technologies Ltd.'s core industry and believes Eco-Bat Technologies Ltd.'s ratings are comparable to those of other issuers with similar credit risk. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Matlock, UK, Eco-Bat Technologies Limited ("Eco-Bat" or the "company") is the world's largest producer of lead based on tonnes sold. Around 88%% of the company's total lead output is from secondary lead smelting, which includes the recycling of spent automotive and industrial lead-acid batteries. The company is privately held, with 86.7% controlled by its chairman, Howard Meyers, and his family. For the 12 months to December 2012, Eco-Bat reported GBP1.7 billion of sales.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Tobias Wagner
Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Chetan Modi
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's changes Eco-Bat's outlook to negative from stable (Ba3 CFR)
No Related Data.

 

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