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Rating Action:

Moody's downgrades ratings for API Heat Transfer ThermaSys Corp. (CFR to Caa2 from Caa1; negative outlook)

10 May 2017

Approximately $300 million of rated debt securities affected

New York, May 10, 2017 -- Moody's Investors Service downgraded API Heat Transfer ThermaSys Corporation's ("API") ratings, including the company's Corporate Family Rating (to Caa2 from Caa1) and Probability of Default Rating (to Caa2-PD from Caa1-PD), and the ratings for its first lien senior secured credit facilities (to B3 from B2), consisting of a $265 million ($240 million outstanding) term loan due 2019 and a $35 million revolver expiring in 2018. The ratings outlook is negative.

The rating actions reflect a weak and eroding liquidity profile given upcoming debt maturities and limited free cash flow generation, as expected over the forward period. At present, revolver availability remains constrained at only $7 million given that the net leverage springing covenant continues to exceed the maximum permitted level. Operating results remain weak with significant revenue and bookings declines given persistently challenging end market conditions (notwithstanding some signs of stabilization) and a heightened competitive environment. Credit metrics have weakened further over the course of the last year. Financial leverage, as measured by Moody's-adjusted debt to EBITDA, has increased to approximately 11x at March 31, 2017, from mid 9x one year ago, and adjusted EBITA to interest is just 0.8x. Moody's believes that the difficult operating environment will continue to pressure API's revenue, earnings and liquidity over the next 12 months. The rating agency recognizes, however, that recent increases in backlog and improving traction in certain end markets (including process/industrial, hydraulic power and engine cooling), supplemented by ongoing strategic growth and cost saving initiatives, should somewhat mitigate the negative impact.

The negative ratings outlook reflects the upcoming maturity of the company's $35 million revolving credit facility (which expires in May 2018) and the increased refinancing risk associated with the company's weakening liquidity profile and over-leveraged capital structure.

The following rating actions have been taken:

Corporate Family Rating, downgraded to Caa2 from Caa1;

Probability of Default Rating, downgraded to Caa2-PD from Caa1-PD;

$265 million ($240 million outstanding) first lien senior secured term loan due 2019, downgraded to B3 (LGD2) from B2 (LGD2);

$35 million first lien senior secured revolving credit facility expiring in 2018, downgraded to B3 (LGD2) from B2 (LGD2);

Rating outlook, changed to negative from stable.

RATINGS RATIONALE

The Caa2 Corporate Family Rating broadly reflects API's very high debt leverage, the cyclicality of its end markets and the associated volatility of revenue and earnings, and a weak liquidity position. The rating also reflects the company's small size relative to other rated manufacturer peers, risks related to ongoing integration and business restructuring initiatives, and long-term risks associated with potential shareholder friendly actions given API's ownership by private equity sponsors. API's rating is supported by its broad product portfolio of heat exchanger offerings, global geographic footprint and production capabilities, and the diversity of its served end markets. Additionally, the company benefits from its solid market position in the highly fragmented global heat exchanger market, and barriers to entry such as product capabilities, long-standing customer relationships and required capital investments.

The ratings outlook could be stabilized if the company addresses its upcoming debt maturities and strengthens its liquidity profile. Over a longer time horizon, the ratings could be upgraded if the company's end markets experience recovering trends and this results in improved earnings and free cash flow generation at levels sufficient to allow Moody's-adjusted leverage to decline below 8.0x and EBITA to interest coverage to improve above 1.0x, both on a sustainable basis.

The ratings could be downgraded if the company fails to extend its debt maturities and improve its liquidity, or if operating performance continues to deteriorate.

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

API Heat Transfer ThermaSys Corporation, headquartered in Buffalo, New York, is a designer and manufacturer of industrial heat exchangers. The company was formed following the combination of two legacy entities: API Group Holdings, LLC and ThermaSys Group Holding in April 2012. API offers a broad range of heat transfer products through its business segments of Compressor & Dryer, Engine Cooling, Hydraulic Fluid Power, Process & Industrial, Sanitary Systems, and Thermasys Tubing. The company is majority owned by private equity sponsor Wellspring Capital Partners. In the last twelve months ended March 31, 2017, API generated approximately $292 million in revenues.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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.

Natalia Gluschuk
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Russell Solomon
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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