Frankfurt am Main, April 06, 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the corporate family rating (CFR) of EVOCA S.p.A.
(EVOCA) to B3 from B2, its probability of default (PDR) rating to
B3-PD from B2-PD, as well as the rating of its senior
secured bond to B3 from B2. The outlook remains stable.
RATINGS RATIONALE
RATIONALE FOR A DOWNGRADE
Today's downgrade reflects the rating agency's expectation
that EVOCA will not be able to deliver the previously expected increase
in EBITDA in the next 12-18 month that would improve its Moody's
adjusted gross debt/EBITDA below 6.0x, which would be commensurate
with a B2 CFR. Based on preliminary results the rating agency calculates
that EVOCA's adjusted gross leverage was around 6.4x in 2019,
which already positioned the company weakly in B2 rating.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The manufacturing sector
has been one of the sectors most significantly affected by the shock given
its sensitivity to consumer demand and sentiment. More specifically,
the weaknesses in EVOCA's credit profile, including its exposure
to Italy, have left it vulnerable to shifts in market sentiment
in these unprecedented operating conditions and EVOCA remains vulnerable
to the outbreak continuing to spread. We regard the coronavirus
outbreak as a social risk under our ESG framework, given the substantial
implications for public health and safety. Today's action
reflects the impact on EVOCA of the breadth and severity of the shock,
and the broad deterioration in credit quality it has triggered.
As a result of the coronavirus pandemics on 10 March EVOCA decided to
suspend production in its Italian facilities located in the Parma and
Bergamo region, representing roughly half of its entire production
capacity. Following the Italian government's ministerial
decree on 22 March suspending all non-essential production the
Company suspended the resumption of activities in these facilities originally
scheduled for 23 March and extended the suspension to its other Italian
facilities.
In addition, Moody's also sees a risk that the pandemics will
lead to a recession in a number of countries, in which EVOCA operates.
In such difficult environment, some of EVOCA's customers may
decide to postpone purchases of new machines, which would hit its
revenues and EBITDA at least through 2020, even though the degree
of the deterioration is difficult to quantify at this point.
To partially offset these challenges Moody's understands that the
company will benefit from the ordinary public scheme for integration of
the salary ("Cassa Integrazione Guadagni Ordinaria"),
enabling it to have some of its Italian employees' salaries (or
at least a part of them) paid by the Italian National Social Security
Institute for up to nine weeks. Furthermore it has identified a
number of cost reduction initiatives to preserve cash flow during this
period and can also resort to a postponement of some capital spending
to protect its cash flows, if needed.
Evoca's B3 ratings also factor in its private equity ownership,
which entails weaker reporting standards than public companies and a financial
policy that has been tolerant of high leverage. Since 2015,
the company's leverage, as adjusted by Moody's,
has oscillated around the agency's 6.0x downgrade trigger
for a B2 rating, being most of the time weaker than that,
even during the periods of a relatively benign operating environment.
The aggressive financial policy is also exemplified by an issuance of
PIK notes outside of restricted group of EVOCA in October 2019,
proceeds of which have been applied to minimise the exposure of the existing
sponsor.
RATIONALE FOR A STABLE OUTLOOK
The stable outlook reflects EVOCA's adequate liquidity position,
enabling the company to weather a period of a weaker operating performance.
After the last October's bond upsizing EVOCA ended up the financial
year 2019 with a fairly sizeable cash of around EUR94 million, which
was well above the levels it had historically carried on its balance sheet.
In addition the company had an access to EUR80 million revolving facility
(undrawn at end of 2019), with a spring-in covenant,
under which the agency expects the company to maintain an ample capacity.
EVOCA does not face any material debt maturities until 2026.
The stable outlook also reflects EVOCA's solid business model,
which has improved over the past five year and which helps offset its
high leverage. EVOCA's business is characterized by high
profitability, a fairly high proportion of variable costs and limited
capital spending up to 4% of sales, which have enabled it
to operate with a positive free cash flow generation over the past six
years. In addition, the refinancing of the capital structure
the company undertook in October last year has reduced its annual interest
bill by roughly EUR10 million, which will benefit EVOCA's
cash flow generation at times when its operating cash flows are likely
to be under pressure. At this point Moody's does not expect
that the company will turn into meaningfully negative free cash flows
generation in 2020.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:
EVOCA's ratings could be downgraded if the company's adequate liquidity
positioned deteriorated, for instance due to material negative free
cash flow generation or if EVOCA's gross debt/EBITDA, as adjusted
by Moody's, exceeds 7.0x for a prolonged period.
An upgrade would require EVOCA to be able to sustain its strong profitability,
with its Moody's-adjusted EBITA margin in high-teens and
a healthy FCF generation, while improving its Moody's-adjusted
gross debt/EBITDA sustainably below 6.0x.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Manufacturing Methodology
published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
COMPANY PROFILE
Headquartered in Bergamo, Italy, EVOCA is a leading manufacturer
of professional coffee machines. As of December 2019, EVOCA
operated nine manufacturing sites and had around 2,000 employees.
The company reported revenue of EUR468 million for the twelve-month
period to June 2019.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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rating assigned, and in relation to a definitive rating that may
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to rated entity, Disclosure from rated entity.
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At least one ESG consideration was material to the credit rating outcome
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Martin Fujerik
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Christian Hendker, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
