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Global Credit Research - 07 Dec 2010
Approximately $410 million of debt securities affected
New York, December 07, 2010 -- Moody's Investors Service assigned a B3 rating to the proposed $410
million of senior secured notes due 2017 being issued by Atkore International,
Inc. (Atkore), and assigned B2 corporate family and probability
of default ratings to the company. The rating outlook is stable.
Atkore is a new company created from Tyco International's sale of
its electrical and metal products business segment. Clayton,
Dubilier & Rice (CD&R) is acquiring a 51% interest in Atkore
and the remaining 49% will be retained by Tyco International.
CD&R's investment is via cumulative convertible participating
preferred shares that initially carry a 12% dividend payable in
cash or additional shares (PIK), subject to debt covenants.
This is the first time Moody's has rated the debt of Atkore.
The B2 corporate family rating reflects Atkore's sensitivity to
fluctuating prices of steel and copper, which comprise about 60%
of its cost of sales, as well as cyclical variations in demand for
its electrical and tubular products. The company operates in a
highly competitive market with little ability to differentiate its products.
It is currently facing a pronounced weakness in the U.S.
non-residential construction market, which represents approximately
60% of its global sales. As a result, the company's
recent operating performance (EBIT of $68 million for the 12 months
ended September 24, 2010) is well below its long-term averages.
Moody's does not see a meaningful recovery in the non-residential
construction market before 2012.
Atkore's financial performance is also impacted by, in our
opinion, relatively high SG&A costs, which we believe
will be addressed by the new management team. However, any
contemplated cost savings may be difficult to achieve, there are
likely to be cash up-front costs associated with some of the cost
saving initiatives, Atkore will incur costs in running the company
on a stand-alone basis, which could be higher than expected,
and there are substantial closing fees (above $30 million) and
annual management fees ($6+ million) that Atkore will pay
to CD&R and Tyco. In addition, pro forma interest on
the debt and dividends on CD&R's $306 million of preferred
stock will be approximately $70 million if the 12% preferred
dividend is paid in cash. As a result of these factors and the
state of the non-residential construction market, we anticipate
Atkore will have limited free cash flow over the next two years.
Atkore's pro forma debt is $695 million as calculated by
Moody's, making leverage a high 5.5x adjusted 2010
EBITDA. In addition to the $465 million of funded debt,
Moody's adjusted debt figure includes $27 million of underfunded
pension obligations, $50 million of debt-equivalent
operating leases, and $153 million of imputed debt associated
with the CD&R preferred stock.
The rating is supported by the diversity of Atkore's product offering
and its market position for many of its products. We also acknowledge
that the company's operating profit will fluctuate but should consistently
be positive due to its ability to pass through raw material costs over
time. We also believe the company will be able to trim its costs
and thereby boost operating margins.
The following ratings were assigned to Atkore International, Inc.
Corporate family rating -- B2
Probability of default rating -- B2
Proposed $410 million of senior secured notes due 2017 --
B3 (LGD5, 71%)
The stable outlook reflects the stability provided by Atkore's margin-over-metal
operating model, our belief that the current soft non-residential
construction market will slowly recover, that Atkore's free
cash flow will be close to breakeven, and that potential cost savings
will solidify the company's operating margins and cash flow.
The rating could be raised if cash flow to debt is sustainably above 5%,
EBIT margin exceeds 7% and adequate liquidity is maintained.
The rating could be lowered if free cash flow is negative, EBIT
margin is less than 5%, or debt to EBITDA exceeds 5 times.
The principal methodologies used in this rating were Global Steel Industry
published in January 2009, and Loss Given Default for Speculative-Grade
Non-Financial Companies in the U.S., Canada
and EMEA published in June 2009.
Atkore International manufactures and distributes electrical conduit,
armored cable, mechanical pipe, tube and other products within
the U.S., Canada, Brazil, the UK,
France, China, Australia, New Zealand, and Saudi
Arabia. Its sales for the 12 months ended September 24, 2010
were $1.4 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, and confidential and proprietary Moody's
Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns B3 rating to Atkore Int'l's sr. sec'd notes; stable outlook
250 Greenwich Street
New York, NY 10007
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