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Global Credit Research - 10 Jan 2011
$850 million of rated notes
New York, January 10, 2011 -- Moody's Investors Service downgraded Harsco Corporation's ("Harsco") senior
unsecured rating to Baa2 from Baa1 and affirmed the company's Prime-2
short-term rating. The action flows from lower expectations
on the pace of recovery and absolute level of operating profitability
over the intermediate term as weakness in the company's Infrastructure
segment persists. This is offsetting stronger results in Harsco's
other segments, and highlights cyclical exposures in the company's
business mix. The outlook was revised to stable from negative.
Senior Unsecured to Baa2 from Baa1
Multiple priority shelf filing; senior unsecured to (P)Baa2,
subordinated to (P)Baa3, preferred to (P)Ba1
Underlying these lowered expectations are poor fundamentals in Harsco's
Infrastructure segment where demand and pricing for scaffolding and concrete
forming equipment used in non-residential and multi-family
construction activity has contracted across its major geographic markets
in Europe and North America. Although the company will focus on
expanding its presence in higher growth emerging markets and more complex
construction projects where stronger pricing may be realized, the
bulk of its revenues continue to be sourced in developed regions in which
Moody's expects the timing of any significant resumption of demand to
be further out in time with low rental equipment pricing likely to prevail
for a protracted period.
Symbolizing these challenges was Harsco's announcement in December
of a restructuring charge expected to range between $85-$90
million, slightly more than half of which will involve cash outlays.
While the underlying actions should lower its expense base in the Infrastructure
segment, in Moody's view savings may only return this segment
towards break-even in 2011. This unit's results will
have swung from revenues and operating profits of $1.54
billion and $185 million respectively in 2008 to an estimated $1.0
billion in revenues and an operating loss which could be in the $50-$60
million range (excluding the December restructuring charge) in 2010 despite
the contributions of multiple acquisitions which were made during this
Stronger year-over-year results in Harsco's other
operating units and restructuring savings achieved to date have only partially
mitigated adverse developments in the Infrastructure segment. Moody's
would expect year-end debt/EBITDA to approach 3 times with EBITA/interest
under 2.5 times for the year with the second half weaker than the
first. While credit metrics should improve during 2011, they
are anticipated to be more reflective of the Baa2 category considering
the cyclical exposures inherent in the company's portfolio of businesses.
The Baa2 long-term and P-2 short term debt ratings recognize
the company's competitive position across a collection of industrial service
and manufacturing businesses, moderate size, and significant
geographic diversification. It further incorporates modest but
more elevated leverage, deterioration in its return on assets and
interest coverage, but ongoing free cash flow generation.
Three of the company's four principal operating segments are performing
well, but critical end-markets across the globe remain cyclical
and two of its largest segments (Metals and Infrastructure) exhibited
substantial swings during the downturn. With nearly 2/3rd's of
revenue earned outside of the U.S. and denominated in local
currencies, results are exposed to fluctuations in exchange rates.
Assuming the company meets its cash flow goals for 2010, funded
balance sheet debt should stabilize around $0.9 billion,
but adjusted debt/EBITDA has increased from a combination of weaker earnings
and debt adjustments for leases and pensions.
Still, Harsco generates substantial amounts of cash flow from operations
and has flexibility to manage capital expenditures in its Infrastructure
segment from both lower requirements as utilization declines and the ability
to transport under-utilized equipment to more promising markets.
This has provided scope to sustain free cash flow during periods of economic
weakness. Moody's believes the company is committed to a sound
capitalization strategy and prudent liquidity management.
The stable outlook considers the support provided by the firm's
liquidity profile, contributions from its other business units which
have produced solid results, benefits of ongoing restructuring initiatives,
and prospects over time for growth from its emerging market presence.
Aggressive shareholder return initiatives or deterioration in business
conditions beyond current expectations could result in a further rating
or outlook change. Moody's would consider debt/EBITDA levels sustained
above 3.5 times or EBITA/interest consistently below 3 times as
quantitative measures pointing towards lower ratings. A positive
outlook or higher ratings could develop if debt/EBITDA stabilized materially
below 2.5 times with EBITA/interest above 4 times.
The last rating action was on May 18, 2010 at which time Harsco's
outlook was revised to negative from stable.
The principal methodology used in this rating was Global Business &
Consumer Service Industry published in October 2010.
Harsco Corporation, headquartered in Camp Hill, PA is a diversified
industrial service company addressing global markets for infrastructure
access, outsourced services to metal industries, metal recovery
& mineral-based products, railway track maintenance and
certain industrial equipment. Annual revenues are approximately
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
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.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades Harsco's senior unsecured rating to Baa2; outlook stable
250 Greenwich Street
New York, NY 10007
No Related Data.
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