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Related Issuers
Rating Action:

Moody's Assigns B2 Ratings to STS Operating Inc.

Global Credit Research - 24 Jan 2014

Approximately $280 million of rated debt affected

New York, January 24, 2014 -- Moody's Investors Service assigned B2 corporate family (CFR) and B2-PD probability of default (PDR) ratings to STS Operating, Inc ("STS"), an integrator and distributor of fluid power and motion control products based in North America. Moody's also assigned a B2 rating to STS's $25 million Senior Secured Revolving Credit Facility and $255 million Senior Secured Term Loan, the proceeds of which are expected to refinance STS's existing debt and fund an $87 million dividend to STS's shareholders. The rating outlook is Stable.

Assignments:

..Issuer: STS Operating, Inc.

....Corporate Family Rating, Assigned B2

....Probability of Default Rating, Assigned B2-PD

....Senior Secured Revolving Credit Facility, Assigned B2 (LGD4, 50%)

....Senior Secured Term Loan, Assigned B2 (LGD4, 50%)

....Outlook, Assigned Stable

RATINGS RATIONALE

The B2 CFR is constrained by STS's modest scale (about $450 million revenue), revenue cyclicality, regional concentration, and a financial policy that is expected to maintain leverage above 4.5x Moody's-adjusted debt-to-EBITDA. The company's margins are consistent with B rated issuers, even as they are modestly higher than other distributors. Moody's attributes this performance to the company's value added engineering and integration capabilities which benefit original equipment manufacturers and machinery operators. Other factors supporting the B2 is the company's end market diversification, Moody's expectation for strong free cash flow generation (8-9% free cash flow to Moody's adjusted debt), and the long tenure of senior management at the company. Moody's expects better interest coverage (3.9x at 2013 year-end on a pro-forma basis) and free cash flow to debt than is typical for B2 rated issuers.

The B2 rating assigned to the proposed first lien senior facilities is in line with the CFR. Specifically, the facility comprises a $25 million senior secured revolving credit agreement due in 2019 and a $255 million senior secured term loan due in 2021. The facility rating is in line with the CFR which reflects the absence of other significant obligations in the enterprise's liability structure.

Moody's expects STS to maintain a good liquidity profile over the next 18 months supported by stable free cash flow generation. The $25 million revolver will be undrawn at transaction close and Moody's does not expect reliance on the revolver to fund working capital or capital investment requirements. Covenant compliance is expected to be strong with only a springing maximum leverage test which is triggered when revolver usage exceeds 25% of availability. The pledge of nearly all the assets to the first lien facility leaves very limited resources for alternative liquidity.

The Stable outlook reflects Moody's expectations of 5% acquisition enhanced growth and virtually no margin expansion; little debt reduction is anticipated unless acquisitions are lower than Moody's expects. Cash flow is expected to remain strong, including high single digit percent free cash flow to debt.

Increased competition with the company's design niche could strain revenue and margins, leading to leverage sustained over 5.5x and free cash flow weakening dramatically, could lead to lower ratings.

Moody's expectation for sustained debt-to-EBITDA below 4.0x and free cash flow to debt sustained in the mid teens percent could lead to higher ratings.

The principal methodology used in this rating was the Global Manufacturing Industry published in December 2010. 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 these methodologies.

Addison, Illinois-based STS is a leading independent fluid power and motion control product distributor and solutions provider. The company has nearly 1,000 employees across 49 facilities located in the United States and Canada. The company generated an estimated 2013 sales of over $450 million and is a portfolio company of Littlejohn & Company.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Zev Halstuch
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Assigns B2 Ratings to STS Operating Inc.
No Related Data.

 

© 2014 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

 


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