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Rating Action:

Moody's downgrades Doncasters to Caa3; outlook negative

17 Sep 2019

London, 17 September 2019 -- Moody's Investors Service ("Moody's") has today downgraded the corporate family rating (CFR) of Doncasters Group Ltd (Doncasters or the company) to Caa3 from Caa1, and downgraded the probability of default rating to Ca-PD from Caa1-PD. Concurrently Moody's has downgraded the ratings of the first lien senior secured facilities (B and C) issued by Doncasters Finance US LLC to Caa3 from Caa1 and the senior secured second lien facilities, also issued by Doncasters Finance US LLC, to C from Caa3. The outlook on both entities remains negative.

The rating action reflects:

• Continued deterioration in Doncaster's trading performance

• The company's high leverage and near-term debt maturities

• Expectation of an imminent restructuring with material impairment of the debt facilities

RATINGS RATIONALE

The Caa3 CFR takes into consideration: (1) the company's unsustainable capital structure with Doncasters' Moody's-adjusted leverage of around 17x as of June 2019; (2) near-term debt maturities with the company's ABL revolving credit facility (RCF) expiring in January 2020, the first lien debt maturing in April 2020 and the second lien in October 2020; (3) expectations that the company's financing will be restructured leading to a default, with limited recoveries for the second lien and impairment of the first lien debt; (4) declining profitability caused by new product introductions and manufacturing issues; (5) a highly competitive market place, with much larger operators than Doncasters, including Precision Castparts Corporation (A2, stable) and Arconic Inc. (Ba2, stable).

These negative factors are only partly offset by: (1) diversified end-market exposure as the company supplies industries with different macroeconomic cycles; (2) long-term arrangements in the largest segments of Aerospace and industrial gas turbines (IGT) which typically allow for the pass-through of metal price changes; and (3) the potential to realise substantial value from operational turnaround and disposals.

Doncasters has experienced trading challenges for an extended period, with weak or variable demand for IGT since 2015; and production difficulties and margin compression from transitioning from legacy to new generation platforms within aeroengine and IGT markets since 2016. Trading has deteriorated further in 2018 and in the first half of 2019, driven by a continuation of these factors alongside operational problems and high scrap rates within the company's superalloys division. Despite growth in revenues as new aerospace programmes ramp up, underlying EBITDA margins fell by 4.1 percentage points to 9% in 2018.

Doncasters has been executing a disposal strategy since 2017 when it agreed the sale of its Fasteners division for $426 million. The breakup and disposal strategy is likely to continue following the expected restructuring. Achieving significant recoveries for lenders will be contingent on the turnaround and sale of some of the remaining business units which have not yet been successfully sold. Moody's considers that the business contains a mix of strategically valuable and more commoditised operations and there are likely to be challenges to achieve disposals across the entire portfolio, which will limit overall recovery potential.

Accordingly, whilst there is limited granularity to consider disposal valuations on a business unit level, and a range of outcomes may be achieved, Moody's assesses that second lien recoveries will be minimal, whilst first lien recoveries are assumed to be in the range 65% to 85%. These recovery levels are commensurate with ratings of Caa3 for the first lien and C for the second lien. The probability of default rating of Ca-PD reflects the high likelihood of a default in the near term.

Governance risks that Moody's considers in Doncasters' credit profile include: (1) recent changes in the management are credit positive with the appointment of a turnaround and restructuring specialist as CEO, notwithstanding the team's short tenure at the company; (2) financial irregularities in one entity in 2017, which could indicate weaknesses of financial control in the context of a disparate group; (3) high levels of adjustments to EBITDA leading to lack of clarity of underlying performance; and (4) inherent challenges in implementing effective governance within a lender-led transaction post restructuring, mitigated by the alignment of equity and debt holders interests and the near term disposal strategy.

LIQUIDITY

The company's liquidity is weak. As at 30 June 2019 Doncasters had cash balances of GBP13 million and availability under its ABL RCF of around GBP24 million. Before disposals and financing cash flows, Doncasters reported negative free cash flow and Moody's expects further cash outflows in 2019. The ABL RCF maturity will need to be extended or replaced by January 2020 in order to preserve liquidity headroom and depending on the company's ability to realise further disposal proceeds, new financing may be required to support the company following a restructuring.

OUTLOOK

The negative outlook reflects the expectation that the company will enter a restructuring process in the near term, which is highly likely result in a default. Given the high leverage and weak liquidity Moody's expects material impairment of the company's debt facilities.

WHAT COULD CHANGE THE RATING UP / DOWN

The ratings could be upgraded if the restructure of the company's balance sheet is resolved with expectations of only limited impairment to the existing debt, or if an alternative transaction is implemented leading to limited impairment.

The ratings could be downgraded if recoveries on the existing debt are likely to be are lower than expected as a result of the pending restructuring.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Doncasters is a vertically integrated manufacturer of high quality engineered precision components for aero engines, industrial gas turbines, and other specialist high performance applications. It serves as a tier 1 and 2 supplier to a diversified industry base including the aerospace, energy, commercial vehicle and petrochemical markets. As at 31 December 2018 the company operated 23 principal manufacturing facilities in the UK, US, Germany, Belgium, China and Mexico. In 2018 Doncasters reported revenues and EBITDA from continuing operations of GBP459 million and GBP33 million respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Martin Robert Hallmark
Senior Vice President
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Richard Etheridge
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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