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Related Issuers
Rating Action:

Moody's downgrades Forgital to B3; outlook negative

17 Apr 2020

Frankfurt am Main, April 17, 2020 -- Moody's Investors Service, ("Moody's") has today downgraded to B3 from B2 the corporate family rating (CFR) and to B3-PD from B2-PD the probability of default rating (PDR) of F-Brasile S.p.A., an indirect holding company of Italian aero-engine and industrial specialized components manufacturer Forgital S.p.A. ("Forgital" or "group"). Moody's also downgraded to B3 from B2 the instrument rating on F-Brasile S.p.A.'s $505 million backed senior secured notes due 2026 and to Ba3 from Ba2 the rating on the €80 million backed senior secured revolving credit facility. The outlook has been changed to negative from stable.

RATINGS RATIONALE

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 weaknesses in Forgital's credit profile, including its high exposure to the commercial aerospace market, which has been identified by Moody's to be significantly affected by the shock, has left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the outbreak continuing to spread.

The downgrade to B3 reflects Moody's view that market conditions in both of Forgital's segments, aerospace and industrial, will significantly deteriorate this year against a coronavirus-led downturn in economic activity, while the length and final implications of the crisis are still hard to gauge at this stage. In particular, Moody's expects a marked slowdown in demand in the group's aerospace business after aircraft manufacturers' recent decision to cut production rates for certain models equipped with engine programs supplied by Forgital (e.g. Trent XWB), amid anticipated shrinking passenger traffic. Moody's therefore forecasts Forgital's topline and earnings to plunge during 2020 and only gradually recover in the following years. The longer term recovery is highly uncertain, as reflected in the negative outlook.

The projected drop in EBITDA will significantly increase Forgital's Moody's-adjusted leverage, which the rating agency expects to exceed its defined maximum debt/EBITDA ratio of 7x for a B3 rating over the next 12-18 months. Despite such weak levels, which could be even higher or sustained longer as the demand recovery beyond 2020 may not materialize as currently anticipated, the rating action also takes into account Forgital's adequate liquidity profile and still positive free cash flow generation in Moody's base scenario. This should also be supported by potential mitigating actions evaluated by the group, including cost cutting initiatives or participation in state-funded support measurers, as and where appropriate, besides disciplined capital spending and working capital management.

LIQUIDITY

Moody's views Forgital's liquidity as adequate, supported by €41 million of cash on the balance sheet and the €80 million fully available super senior revolving credit facility (RCF) as of 30 September 2019. These funds together with expected modest free cash flow generation (assuming reduced capital spending of less than €20 million for 2020 and some working capital reductions) are more than sufficient to cover minor short-term debt maturities and a potential earn-out component connected to Forgital's acquisition in 2019.

The super senior RCF is subject to a springing super senior net leverage covenant, tested when the facility is drawn down for more than 40% (net of cash balances). Moody's expects Forgital to remain in compliance with this covenant over the next 12-18 months.

ESG CONSIDERATIONS

Moody's considers the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Forgital of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

OUTLOOK

The negative outlook reflects Moody's expectation that Forgital's operating performance and credit metrics will materially weaken during 2020. Specifically, it balances Forgital's financial leverage, which Moody's expects to exceed the 7x maximum level for a B3 rating over the next 12-18 months, with modest positive FCF generation and consistently adequate liquidity. Given the still uncertain implications of the coronavirus spreading for Forgital and its stakeholders, the negative outlook also mirrors a potential sharper performance shortfall this year and slower demand recovery thereafter, especially in the aerospace business.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's would consider to downgrade Forgital, if (1) it failed to reduce leverage below 7x Moody's-adjusted debt/EBITDA by the end of 2021, (2) Moody's-adjusted FCF turned negative, (3) its liquidity profile deteriorated.

Upward pressure on the ratings would build, if Forgital's (1) leverage reduced below 6x Moody's-adjusted debt/EBITDA on a sustainable basis, (2) Moody's-adjusted FCF remained consistently positive, (3) at least adequate liquidity could be sustained.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Aerospace and Defense Industry published in March 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1108840. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Vicenza, Italy, F-Brasile S.p.A. is an intermediate holding company of the Forgital group, a leading vertically integrated forging company servicing the commercial and military aerospace industries and select industrial end-markets. The group operates nine facilities in Italy, France and the USA with around 1,200 employees worldwide.

Forgital supplies its products to aerospace (around 63% of group sales as of LTM ended September 2019) and various industrial end-markets (37%). For LTM September 2019, Forgital reported sales of €440 million and company-adjusted EBITDA of €89 million (20% margin).

In September 2019, global investment firm The Carlyle Group (Carlyle) completed the acquisition of Forgital from members of the founding Spezzapria family and a minority stake held by Fondo Italiano d'Investimento.

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 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

Goetz Grossmann, CFA
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

No Related Data.
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