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Rating Action:

Moody's affirms Douglas Dynamics CFR at B1; downgrades term loan rating to B2

24 Jun 2016

Approximately $316 million of debt obligations affected

New York, June 24, 2016 -- Moody's Investors Service affirmed Douglas Dynamics L.L.C.'s (Douglas Dynamics) Corporate Family and Probability of Default ratings at B1, and B1-PD, respectively. In related action Moody's downgraded Douglas Dynamics' senior secured term loan rating to B2 from B1. The rating action incorporates the proposed $130 million add-on amount to the senior secured term loan. The Speculative Grade Liquidity Rating ("SGL") was downgraded to SGL-3 from SGL-2. The rating outlook remains stable.

Proceeds from the $130 million senior secured add-on term loan along with additional funds from the company's revolving credit facility and cash balances will be used to fund the recently announced acquisition of Dejana Truck & Utility Equipment Companies (Dejana) for a purchase price of $206 million including a $26 million earn out provision. Dejana is a leading fitter of Class 4-6 trucks and other commercial work vehicles in the Eastern U.S. Dejana also is a leading specialized manufacturer of storage solutions for trucks and vans and cable pulling equipment for trucks.

Moody's took the following rating actions on Douglas Dynamics L.L.C.:

Ratings affirmed:

Corporate Family Rating, at B1;

Probability of Default Rating, at B1-PD;

Rating downgraded:

$316 million (upsized amount) senior secured term loan due 2021, to B2 (LGD4) from B1(LGD4);

Speculative Grade Liquidity Rating, to SGL-3 from SGL-2

Rating Outlook, Stable.

RATING RATIONALE

The affirmation of Douglas Dynamics B1 CFR reflects the competitive benefits of the acquisition of Dejana, which mitigate the pro forma increase in Debt/EBITDA leverage to 3.2x (incorporating Moody's standard adjustments) due to the acquisition from 2.2x. Douglas Dynamics' base business of manufacturing snow and ice control equipment for light trucks and other vehicles is highly variable as it is subject to annual snow fall levels. The Dejana acquisition will further diversify Douglas Dynamics' business profile and moderate the impact of weather on the company's performance. The acquisition of Henderson Enterprise Group, Inc. in December 2014 also helped diversify the company's operations into governmental agencies such as Departments of Transportation and municipalities. With pro forma Debt/EBITDA leverage remaining within the 2.5x-3.5x normalized range anticipated for the rating assuming average snowfalls, the transaction is modestly credit positive. The transaction should further demonstrate the company's successful management of the business within the assigned rating over the years supported by a flexible cost structure and an extensive distribution network.

The downgrade of the senior secured term loan to B2 from B1 reflects its increased size and the increased utilization of the revolver, which has a stronger collateral position than the term loan. The rating also incorporates expected weaker asset coverage for the secured term loan under a default scenario.

The Speculative Grade Liquidity rating downgrade to SGL-3 from SGL-2 reflects the reduction in cash and increased revolver usage to support the Dejana acquisition, and our expectation of an adequate liquidity profile over the next 12-15 months. Moody's expects the company will utilize substantially all of its $48.4 million cash as of March 31, 2016 to help fund the Dejana acquisition. Liquidity is supported by a $100 million asset-based revolving credit facility, and anticipated free cash flow generation. As of March, 31, 2016 the company had about $98 million of availability under the revolving credit facility. Pro forma for the acquisition, revolver availability is expected to decline to about $63 million. Moody's projects availability will fall further to a $30-$40 million range as increases in inventory in the second and third quarters to support the peak selling season consumes cash. Yet, over the next 12-15 months, Douglas Dynamics is expected to generate free cash flow as a percentage of debt in the high single digit range which should support increasing availability under the revolver as seasonal sales pick up. The financial covenant under the revolving credit is a springing minimum 1.0x fixed charge coverage ratio (FCCR) test if availability falls below $12.5 million. The covenant is unlikely to be tested over the next 12-15 months, but Moody's expects the FCCR will remain comfortably above 1.0x. There are no term loan financial maintenance covenants.

The stable outlook incorporates the expectation that Douglas Dynamics' operating flexibility and more diverse business profile will continue to drive operating performance that sustains meaningfully positive free cash flow and debt-to-EBITDA within the range expected for the assigned rating.

The company's small scale, weather-dependent seasonal demand, and shareholder-friendly financial philosophy limit upward rating momentum. However, Moody's could consider upgrading the rating if the company carried very little balance sheet debt and maintained a significant liquidity cushion. Moody's could downgrade the rating if Moody's expects debt-to-EBITDA leverage to be sustained above 4 times, persistently negative free cash flow, or a substantive deterioration in liquidity.

The principal methodology used in these ratings was Global Automotive Supplier Industry published in June 2016. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Douglas Dynamics designs, manufactures, sells, and supports snow and ice control equipment for light trucks. Headquartered in Milwaukee, Wisconsin, the company generated approximately $395 million of revenue for the twelve months ended March 31, 2016.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Timothy L. Harrod
VP - Senior Credit Officer
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

Robert Jankowitz
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 affirms Douglas Dynamics CFR at B1; downgrades term loan rating to B2
No Related Data.
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