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Global Credit Research - 18 May 2010
Approximately $490 million of rated debt securities affected
New York, May 18, 2010 -- Moody's Investors Service assigned new ratings to Xerium Technologies,
Inc. ("Xerium") following the confirmation of the company's reorganization
plan in bankruptcy court. The ratings include a B3 corporate family
rating, a Ba3 rating for its $80 million first-lien
senior secured credit facility, and a B3 rating for its $410
million second-lien senior secured credit facility. At the
same time, Moody's assigned a speculative grade liquidity
rating of SGL-3 and a stable outlook.
On May 12, 2010, Xerium announced that its reorganization
plan had been confirmed in bankruptcy court and that it planned to emerge
from bankruptcy protection as early as late May. Following emergence,
the company's revised capital structure will consist of an $80
million first-lien senior secured exit facility (with a $20
million revolver and $60 million term loan) due 2014 and a $410
million second-lien senior secured term loan due 2015. In
addition, the holders of the second-lien debt will own 82.6%
of Xerium's post-emergence common stock. The balance sheet
restructuring will represent a significant debt reduction from the approximately
$625 million outstanding at March 31, 2010. The ratings
are assigned pending the emergence from bankruptcy and the closing of
the exit financing.
The B3 corporate family rating reflects the many challenges that still
lie ahead for Xerium, despite the improved capital structure and
liquidity profile. Moody's anticipates that it will take
the company longer than expected to recover from the substantial volume
losses of 2009 as the company continues to face the risk of more North
American paper production capacity reductions. In addition,
the company's recent investments in new products and developing economies,
where we expect the majority of the growth will occur, will take
several years before having a meaningful positive impact on earnings or
cash flow. Lastly, post-transaction debt leverage
remains high and Xerium's liquidity is very limited, raising the
potential for distress should its sales languish.
At the same time, the B3 corporate family rating acknowledges the
increased financial flexibility and improved debt leverage Xerium has
attained by restructuring its balance sheet. Moody's expects
adjusted debt leverage, which was equal to approximately 7.3x
at December 31, 2009, to decrease to below 6.5x,
a level more appropriate for a B3 rated company, by fiscal year
end 2010. In addition, the cost reduction initiatives the
company has implemented over the past several years should begin to increase
margins in 2011 and 2012. Lastly, Xerium's sizable
market position and moderate geographic diversity provide support to the
The stable outlook reflects Moody's expectation that the global
recovery in paper demand, combined with Xerium's cost reduction
initiatives, right-sized capital structure, and lack
of any meaningful near-term debt maturities, should allow
the company to generate B3-level credit metrics over the next 12-18
months, while avoiding any significant liquidity pressures.
The ratings and/or outlook could be lowered if Xerium continues generating
operating losses or faces challenges in complying with its financial covenants.
The ratings and/or outlook could be raised if Xerium is able to turn free
cash flow positive, remain in compliance with its financial covenants,
and experience a material expansion in EBITDA such that adjusted debt
leverage falls to less than 5.5x on a sustainable basis.
The following ratings were assigned to Xerium:
B3 corporate family rating;
B3 probability of default rating;
Ba3 (LGD1, 4%) to the $20 million first-lien
senior secured revolver due 2014;
Ba3 (LGD1, 4%) to the $60 million first-lien
senior secured term loan due 2014;
B3 (LGD4, 50%) to the $410 million second-lien
senior secured term loan due 2015;
SGL-3 speculative grade liquidity rating;
Moody's last rating action concerning Xerium occurred on March 30,
2010, at which point the company's probability of default rating
was lowered to D following its bankruptcy filing. The principal
methodology used in rating Xerium was Moody's Global Paper & Forest
Products Industry rating methodology published in September 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 Xerium can also
be found in the Rating Methodologies sub-directory on Moody's
Xerium Technologies, Inc., headquartered in Raleigh,
NC, is a manufacturer and supplier of consumable products used primarily
in the production of paper.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's assigns B3 corporate family rating to Xerium
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
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