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Global Credit Research - 05 May 2010
Approximately EUR 160 million of rated debt affected
Frankfurt, May 05, 2010 -- Moody's Investors Service has assigned a B3 Corporate Family Rating (CFR)
and a B3 Probability of Default Rating (PDR) to TMD Friction Group S.A.
("TMD"). At the same time, Moody's has assigned
a provisional P(B3) rating to the proposed EUR 160 million Senior Secured
Notes. The rating outlook is stable.
The B3 Corporate Family Rating reflects TMD's (i) strong position
in the original equipment and aftermarket for automotive brake pads and
linings, (ii) a large share of revenues generated in the usually
more resilient aftermarket, (iii) a strong technology which allows
supplying OEM customers worldwide despite varying product requirements
in different regions, (iv) established and solid relationships with
automobile manufacturers and auto equipment suppliers, and (v) an
enhanced cost base on the back of successful rationalization and cost
reduction initiatives in recent years. The rating also considers
the earnings recovery in the second half of 2009 which continued in the
first quarter of 2010. In H2 2009, TMD achieved reported
EBITDA of EUR 26.5 million compared to EUR 0.7 million in
H1 2009 (before restructuring costs and Moody's standard adjustments).
Furthermore, the rating reflects our understanding that TMD's
major shareholder - private equity firm Pamplona Capital Management
- is willing to support future external growth also with new equity
and supports a target leverage ratio of 2.5-3.5x
Net Debt/EBITDA (before Moody's standard adjustments).
The rating is, however, constrained by a limited diversification
in terms of geography (more than 80% of 2009 revenues were generated
in Europe) and product scope. In addition, there is strong
competition among suppliers in the market for automotive original equipment
("OEM") which is also strongly exposed to the overall economic
environment. Although TMD's aftermarket business, which
comprises original replacement parts sold through OEM dealerships ("OES")
and TMD branded or private label parts sold through independent garages
or repair shops ("IAM"), is more resilient, the
recent recession has shown that these activities are not immune to the
overall economic environment. This is also evidenced by a revenue
decline of -7% in 2008 and -17% in 2009 on
a group level. Moreover, the company is exposed to raw material
price fluctuations (e.g. steel, copper, chemicals)
and it might be challenging to recover increasing input costs from customers
in a timely fashion. Though Moody's notes that the company
was reorganized and recapitalized in 2009, these challenges combined
with a highly leveraged capital structure also resulted in a financial
restructuring of TMD in 2006 and eventually forced the company into insolvency
in late 2008.
Moody's rating assessment is based on the expectation that TMD can
broadly sustain the performance shown in the second half of 2009 and the
first quarter of 2010 which should result in EBITDA for the full year
2010 in the range of EUR 50 million (before restructuring costs and Moody's
standard adjustments) and Debt/EBITDA towards 4x (as adjusted by Moody's).
While this leverage ratio would position the rating adequately in the
single-B rating category, Moody's notes that the capital
structure following the proposed bond issue will be debt weighted given
the intended use of proceeds (see below).
The proposed EUR 160 million Senior Secured Notes will be issued by TMD
Friction Finance S.A., a fully owned subsidiary of
TMD Friction Group S.A. The proposed notes will benefit
from upstream guarantees of operating subsidiaries that account for 80%
of 2009 revenues and 79% of 2009 EBITDA. The proposed notes
will further benefit from tangible collateral in form of (i) certain fixed
assets of guarantors in Germany and the UK, (ii) certain inventory
of guarantors in Germany, France and the UK, and (iii) trade
receivables of guarantors in the UK but not France and Germany (as French
and German receivables would potentially be used for a receivable discounting
Apart from the proposed Senior Secured Notes there will only be small
amounts of local overdraft facilities and finance lease in TMD's
debt structure. While the proposed financing structure is essentially
an 'all bond' structure, we believe a family recovery
rate of 50% (Moody's standard assumption for debt structures
including bond and bank debt) is the most appropriate assumption for applying
Moody's Loss-Given-Default Methodology. This
view is based on our estimate of a distressed enterprise value in case
of default. Given these assumptions Moody's Loss-Given-Default
Methodology results in a (P)B3 instrument rating for the EUR 160 million
Senior Secured Notes. This provisional (P)B3 rating is based on
draft documentation received so far and subject to our satisfactory review
of final documentation.
The proceeds of EUR 160 million are planned to be used (i) for a distribution
of approximately EUR 132 million to Pamplona Capital Management by way
of refinancing existing shareholder loans plus accumulated interest,
(ii) as additional liquidity of approximately EUR 18 million and (iii)
to cover transaction expenses.
In this context Moody's notes that, absent any material committed
credit facility, TMD's liquidity position is limited to cash
on hand (EUR 65 million per the end of 2009 and EUR 40 million per the
end of March 2010) and we caution that prospects for material positive
Free Cash Flow generation remain limited in our view given the interest
payments on the proposed EUR 160 million Senior Secured Notes.
..Issuer: TMD Friction Finance S.A.
....Senior Secured Regular Bond/Debenture,
Assigned (P)B3, LGD3, 47%
..Issuer: TMD Friction Group S.A.
....Probability of Default Rating, Assigned
....Corporate Family Rating, Assigned
This is the first time that Moody's has rated this company.
The principal methodology used in rating TMD was Moody's Global Auto Supplier
Industry Methodology, published in January 2009 and available on
www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
TMD is a manufacturer of brake pads and linings based in Luxembourg.
The company generated EUR 530 million of revenues in 2009. Thereof
40% of 2009 were generated by the IAM segment, 31%
by OES and 29% by OEM. While expanding abroad TMD is strongly
reliant on the European home market which accounted for 83% of
2009 revenues. TMD was bought by Pamplona Capital Management out
of an administration process in April 2009. TMD's management
also holds an equity interest in the company.
Eric de Bodard
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns B3 Corporate Family Rating and provisional (P)B3 Bond Rating to TMD Friction -- Outlook stable
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
No Related Data.
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