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Rating Action:

Moody's assigns B2 CFR to ThermaSys Corporation (d.b.a. API Heat Transfer); rates first lien credit facility B1

Global Credit Research - 23 Apr 2013

Outlook Stable

New York, April 23, 2013 -- Moody's Investors Service today assigned ThermaSys Corporation (d.b.a. API Heat Transfer) a first time Corporate Family Rating (CFR) and Probability of Default Rating (PDR) of B2 and B2-PD, respectively. Concurrently, Moody's assigned a B1 rating to the company's proposed $300 million first lien credit facility, which incorporates a $265 million term loan and $35 million revolver. The B1 rating on the first lien facilities, one notch above the CFR, reflects its seniority position in the capital structure relative to the company's $130 million of unrated mezzanine notes. The rating outlook is stable.

The company was formed following the combination of two legacy entities: API Group Holdings, LLC and ThermaSys Group Holding. Proceeds from the issuance are expected to be used to refinance existing debt, pay a dividend of approximately $81 million to shareholders, and cover transaction related fees and expenses.

The following ratings have been assigned (subject to the review of final documentation):

B2 Corporate Family Rating;

B2-PD Probability of Default Rating;

B1 (LGD3, 34%) to the proposed $265 million first lien term loan due 2019; and

B1 (LGD3, 34%) to the proposed $35 million first lien revolver due 2018.

The outlook is stable

RATINGS RATIONALE

The B2 corporate family rating reflects API's limited operating history as a combined entity, small size relative to the rated manufacturer universe, cyclicality, and relatively high leverage. At the same time, the rating also considers API's broad product portfolio of heat exchanger offerings, as well as its global production capabilities and associated good geographic revenue diversification profile. API maintains a solid market position in the highly fragmented global heat exchanger market, which is strengthened by some notable barriers to entry including technological know-how and long-standing customer relationships. Although API has limited patent protection on most of its products, the company works alongside customers during the design phase and ultimately owns the customized product design at completion. We expect API's liquidity to be solid during the next twelve months stemming from positive free cash flow generation and access to its revolving credit facility.

Moody's recognizes the company's initial leverage is high, with pro-forma debt-to-EBITDA (Moody's adjusted) exceeding 6.0 times; however, the high leverage is counterbalanced by API's solid interest coverage and relatively low maintenance capital expenditures.

The stable outlook assumes API will complete any remaining integration activities without any major disruptions, generate positive free cash flow, and use much of that cash flow for debt repayment during the next twelve months such that leverage improves to below 6.0 times at FYE13.

The ratings could be upgraded if the company demonstrates a longer track record as a combined entity, can generate solid free cash flow and improve credit metrics such that leverage is sustained below 4.5 times.

The ratings could be downgraded if the company's operating performance deteriorates as a result of margin or revenue weakness or if the company generates negative free cash flow. More specifically, if debt-to-EBITDA were to approach 7.0 times the ratings could be downgraded. In addition, if the company were to lever up for an acquisition or another dividend the ratings could be downgraded.

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.

ThermaSys Corporation (d.b.a. API Heat Transfer), headquartered in Buffalo, NY, is a designer and manufacturer of industrial heat exchangers. The company was formed following the combination of two legacy entities: API Group Holdings, LLC and ThermaSys Group Holding. API offers a broad range of heat transfer products through its six business units; Airtech, Basco, Covrad GT, Schmidt-Bretten, Thermal Transfer Products, and ThermaSys Tubing. ThermaSys Corporation is a wholly-owned subsidiary of ThermaSys Finance Company (the Parent), which is majority owned by private equity sponsor Wellspring Capital Partners. On a pro-forma basis, assuming the legacy entities had been merged since the beginning of 2012, API Heat Transfer generated revenues of nearly $420 million for the twelve months ended December 31, 2012.

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.

Brian Silver
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

Alexandra S. Parker
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 CFR to ThermaSys Corporation (d.b.a. API Heat Transfer); rates first lien credit facility B1
No Related Data.

 

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