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Rating Action:

Moody's assigns B1 CFR to Rebecca Bidco (RENK); stable outlook

29 Jun 2020
NOTE: On July 6, 2020, the press release was corrected as follows: In the first sentence of the second paragraph of the press release, the length of the notes was changed to “5-year,” and in the first sentence of the PRINCIPAL METHODOLOGY section, the name of the principal methodology was changed to “Aerospace and Defense Industry”. Revised release follows.

Frankfurt am Main, June 29, 2020 -- Moody's Investors Service ("Moody's") has today assigned a B1 corporate family rating (CFR) and B1-PD probability of default rating (PDR) to Rebecca BidCo GmbH, a holding company formed to effect the acquisition of RENK AG (RENK or the company) by the "Triton V" fund advised funds managed by Triton. RENK is a manufacturer of drive technologies and is active in various end markets, including defense, marine, cement, oil & gas, and power generation.

Concurrently Moody's has assigned B1 instrument rating to the proposed EUR300 million 5-year senior secured notes, issued by Rebecca BidCo GmbH. The outlook on the ratings is stable.

The proceeds of the debt financing, alongside new equity, will be used to finance the acquisition of a 76% stake in RENK AG from Volkswagen Vermögensverwaltungs-GmbH, a subsidiary of Volkswagen AG (A3 negative), as well as to pay transaction related fees and expenses.

RATINGS RATIONALE

The rating reflects the company's: (1) strong positions in niche markets for military tracked vehicle transmissions and naval gearboxes, which have high barriers to entry; (2) its large military end market and aftermarket exposures, which together account for more than 70% of revenues, providing with some earnings stability in weak economic environment; (3) an increasing maintenance intensity in the defense sector, due to aging military vehicle and navy fleets, supporting demand for company's products and services; (4) good near term revenue visibility, supported by sizable order backlog representing 1.5x of sales as of year-end 2019; (5) attractive margins in its defense business reflecting its sole source positions, limited competition and low product substitution risk; and (6) long relationships with Ministries of Defense and OEMs underpinned by product expertise.

The rating also reflects: (1) the company's relatively small scale, with EUR559 million of revenues in 2019; (2) its exposure to commercial end markets including oil & gas and civil marine, which Moody's expects to weaken this year and which may lead to a continuation of the operating margin pressure observed over the last few years; (3) the potential for demand reductions due to delay in the production or shipping of defense products or cuts in defense spending due to fiscal constraints; (4) track record of negative free cash flow (FCF) generation in the past three years, with FCF generation dependent on working capital which was volatile in the past; (5) risks that existing competitive price pressures in selected industrial end markets will further intensify in the current economic downturn; and (6) starting pro forma Moody's-adjusted gross leverage of 4.5x based on 2019 financials. The rating considers that any additional funds required to buy out minority shareholders of RENK in excess of the initial debt quantum to be raised with the proposed transaction, would be funded from an equity injection from the private equity sponsors.

In Moody's view the impact of coronavirus pandemic on RENK's results should be fairly limited in 2020 given revenue visibility, in particular in its defense business and due to material aftermarket activities. However, the company may experience a delay of certain service and maintenance projects due to travel restrictions this year with expectation of a subsequent recovery of forgone maintenance activity in 2021.

Moody's recognizes that RENK has a history of complying with financial, legal and regulatory requirements in its operating jurisdictions, also being a listed company. Governance risks that Moody's considered in RENK's credit profile include: 1) financial policies which are likely to maintain relatively high leverage and 2) reliance on key individuals to maintain strong OEM relationships and manage new contracts. Moody's would expect appropriate management incentives in place under an LBO to retain key staff.

LIQUIDITY

Moody's considers RENK's liquidity profile to be adequate. As of Q1 2020, the company had a cash balance of €117m however Moody's understands it will reduce by €40 million with the expected shareholder loan repayment in 2021, which is a part of this transaction. At closing the company will have access to the initially undrawn committed €50 million super senior revolving credit facility (RCF). In addition, the company will put in place €167.5 million of guarantee lines at deal closing. The cash balances and the RCF will provide the company with some headroom to accommodate swings in working capital. The revolving credit facility has springing net financial leverage covenant, tested if RCF is more than 40% drawn. The covenant is set with ample initial headroom at closing of the transaction and Moody's expects RENK to ensure covenant compliance at all times.

STRUCTURAL CONSIDERATIONS

Post closing of the transaction, a Domination and Profit and Loss Transfer Agreement ("DPLTA") will be established between Rebecca BidCo GmbH and RENK AG, which is expected to take approximately 5-7 months. As long as this process is pending finalization and subject to a number of steps - including a possible court decision in the event that the minority shareholders contest the agreement -- RENK AG and its subsidiaries will not be guaranteeing the proposed notes issued by Rebecca BidCo GmbH. Moody's believes that the probability that the DPLTA may not be executed is fairly small. The assigned ratings are based on the expectation that the transaction is executed as currently envisaged by management.

Upon completion of the DPLTA, the proposed EUR300 million senior secured notes will be guaranteed by RENK's subsidiaries accounting for approximately 80% of the group's consolidated EBITDA and will be secured by certain assets (mainly share pledges and bank accounts) of the guarantors. The EUR50 million super senior RCF benefits from the same security package and guarantor coverage as the senior secured notes, but receives enforcement proceeds in case of liquidation prior to senior secured notes holders. Hence, Moody's has ranked the super senior RCF ahead of the secured notes. Trade payables, as well as lease rejection claims and pension obligations, are ranked at the same level as the senior secured notes. Assuming a standard 50% recovery rate for capital structures with both bond and bank debt, the senior secured notes are rated B1 in line with the CFR.

OUTLOOK

The stable outlook reflects Moody's expectations that RENK's business is resilient enough to avoid Moody's-adjusted leverage rising sustainably above 5.0x in the next 18-24 months, while generating small but positive free cash flow. In addition, the outlook assumes that the company maintains adequate liquidity and no debt-financed acquisitions or distributions will occur which would result in a material increase in leverage.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

A ratings upgrade is unlikely in the near-term because of currently weak operating environment and continuing uncertainty related to the coronavirus. In addition, a continued growth of backlog and improvement in scale and business diversification through a higher share of maintenance activities would be necessary for an upgrade. It would also require that Moody's-adjusted gross leverage reduces below 4.0x, EBITA margins increase above 12% and FCF / Debt improves to the high single digit percentages.

The ratings could be downgraded if Moody's-adjusted gross leverage rises sustainably above 5.0x, if EBITA margins reduce below 8%, free cash flow turns negative and liquidity profile deteriorates. A downgrade could also occur if funds required to buy out minority shareholders of RENK would be financed by debt resulting in a material increase in leverage.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108840. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Augsburg, Germany, RENK is a manufacturer of high-quality gear units, automatic transmissions, slide bearings, suspension systems, couplings, and test systems. Operating through four business units: Vehicle Transmissions, Special Gear Units, Standard Gear Units, and Slide Bearings, the company serves a diverse set of end markets, with around half of its revenues in the defense sector. RENK operates through 7 production sites and 13 branches globally. In 2019 the company reported EUR559 million of revenues.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

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.

Svitlana Ukrayinets
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Anke Rindermann
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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