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Global Credit Research - 13 Apr 2011
London, 13 April 2011 -- Moody's Investors Service has today assigned Ideal Standard International
SA ("Ideal Standard" or "the company") a corporate
family rating ("CFR") of (P) Caa1, and a Probability
of Default Rating (PDR) of (P) Caa1. At the same time, the
agency has assigned a (P) Caa1 rating to the EUR250 million senior secured
bond due 2018 to be issued by Ideal Standard International SA and guaranteed
by Ideal Standard Holding Sarl and its main subsidiaries. The ratings
outlook is stable.
"The (P) Caa1 CFR reflects: i) the company's exposure
to the home improvement and residential and commercial construction sector,
which has not recovered from the recent downturn; ii) its reliance
on the successful execution by the management team of a long-term
restructuring initiative to realize projected cash flows, and transform
its current weak financial profile; iii) the company's plan
to over time rationalize and reposition its brands; and iv) its exposure
to the risk of increases in input costs," says Tanya Savkin,
Moody's lead analyst for Ideal Standard. "More positively,
the rating also reflects: i) Ideal Standard's significant
potential to enhance margins through cost reduction, particularly
through plant closure and staff reductions; ii) its geographic diversification
within Europe; iii) its range of reasonably strong international
brands; and iv) its strong liquidity position. The (P) Caa1
instrument rating reflects the fact that the bond represents almost all
of the company's external debt," Ms. Savkin adds.
The recent recession has had an adverse impact on the home improvement
and residential and commercial construction markets. The market
for bathroom fixtures, fittings and furniture was also affected,
such that Ideal Standard's sales dropped from EUR957 million in
2008 to EUR737 million in 2009, a decline of 23%.
While the decline in these markets appears to have bottomed out,
a robust recovery is not assured.
The company's prospects depend largely on its ability to execute
successfully an ambitious restructuring plan. intended to tackle
both the excess manufacturing capacity and the high overhead costs that
left the company vulnerable to the economic downturn. Moody's
believes that the company is likely to achieve its near-term objectives
of closing facilities in France and the UK, but that the longer-term
objective of further rationalizing excess capacity and reducing overheads
may prove more challenging.
Ideal Standard has a number of brands that are less well known and so
offer it little in the way of pricing power or margin protection.
As a result, it plans to rationalize its portfolio of more than
20 brands to focus on the six that collectively represent more than 75%
of its revenues. In response to the changing dynamics of its marketplace,
the company also plans to quicken the pace of product innovation;
in 2010, only 15% of sales came from products introduced
in the last three years, the company expects about 30% of
sales to come from such products in the long term. While essential,
the rationalization of the product portfolio will, in Moody's
view, stretch the resources of the company as it undertakes a complex
As raw materials accounted for about 41% of cost of sales in 2010,
Ideal Standard is exposed to the risk of increases in the prices of raw
materials, including copper, zinc, brass components,
chromium, clay, and methyl methacrylate (MMA) as well as fuel;
in 2010, approximately EUR40m or 7% of cost of sales related
to brass, copper and zinc and EUR8 million, or 1.4%,
related to MMA. Indeed, the prices of these commodities have
already increased dramatically in the last few years. The company's
ability to hedge itself against such price increases is limited and,
given the difficult operating environment and its efforts to reposition
its brands, Ideal Standard's ability to pass on such price
increases to its customers is not assured.
More positively, Moody's notes that the successful execution
of its restructuring plan should have a very positive impact on Ideal
Standard's credit metrics. The rating agency expects the
company to achieve its targets for 2011, even if its sales are relatively
flat and its margins suffer from some commodity price increases.
As a result, the rating agency expects the company's gross
leverage (debt/adjusted EBITDA, as measured by the company) to decline
somewhat from the 2010 pro-forma level of c.5x.
Lending additional strength to the ratings is Ideal Standard's geographic
diversification. Although sales are concentrated in Europe,
they are divided between several major markets, namely the UK,
Italy and Germany, which together represent 57% of 2010 revenues.
Ideal Standard also serves markets in France and Greece and has established
a presence in emerging markets, principally Eastern Europe and the
Middle East. Collectively, these smaller markets account
for about a quarter of sales.
Although the company is looking to eliminate some of its brands and reposition
the remainder, it nonetheless has several that enjoy international
recognition and so lend stability to its cash flows and support its ratings.
In response to the changing dynamics of its marketplace, the company
also plans to quicken the pace of product innovation; in 2010,
only 15% of sales came from products introduced in the last three
years. While success is not assured, it is important if the
company is to maintain revenue growth in a difficult market environment
and protect margins against rising commodity prices.
At the end of 2010, balance sheet cash stood at EUR75 million.
After repaying the senior bank debt, Ideal Standard will retain
an additional EUR59 million in cash, for a total of EUR134 million.
In addition, the transaction will provide the company with a committed
revolving credit facility of EUR15 million. This should be sufficient
to fund the company over the near term.
The ratings have been assigned on a provisional basis as they are conditional
on the successful completion of the refinancing transaction. Moody's
issues provisional ratings in advance of the final sale of securities
and these ratings reflect Moody's preliminary credit opinion regarding
the transaction only. Upon a conclusive review of the final documentation,
Moody's will endeavour to assign a definitive rating to the notes.
A definitive rating may differ from a provisional rating.
The stable rating outlook reflects Moody's expectation that the
economic recovery will continue, albeit slowly; that Ideal
Standard may experience cost increases that it will find difficult to
pass on to its customers; and that the company will be largely successful
in implementing the near-term goals of its restructuring plans.
Upward pressure on the rating could occur if free cash flow (post-restructuring
charges) turns positive. Conversely, downward pressure on
the rating or outlook could occur if concerns were to develop about the
company's liquidity profile and/ or the implementation of the restructuring
The principal methodology used in rating Ideal Standard International
Holdings S.a.r.l. and Ideal Standard International
S.A. was the Global Consumer Durables Industry Methodology,
published October 2010. Other methodologies used include Loss Given
Default for Speculative Grade Issuers in the US, Canada, and
EMEA, published June 2009.
Headquartered in Belgium, Ideal Standard is a manufacturer of bathroom
fixtures, fittings and furniture, including ceramic fixtures
(sinks, toilets), brass fittings (taps), acrylic fixtures
(spa and whirlpool tubs) and furniture (towel racks, toilet seats).
Revenues in 2010 were EUR753 million.
Information sources used to prepare the credit rating are the following:
parties 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.
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independent third-party sources. However, Moody's
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Please see ratings tab on the issuer/entity page on Moodys.com
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Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
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Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
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Moody's Investors Service Ltd.
Moody's assigns (P) Caa1 rating to Ideal Standard 2018 Notes; stable outlook
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