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Global Credit Research - 14 Apr 2010
New York, April 14, 2010 -- Moody's Investors Service moved GrafTech International Ltd.'s
(GrafTech) rating outlook to positive from stable, assigned a Ba1
rating to new $230 million senior secured revolving credit facility,
affirmed its Ba2 Corporate Family Rating (CFR) and moved its Probability
of Default (PDR) rating to Ba3. The new revolving credit facility
will replace the company's existing undrawn $215 million
revolver maturing in July 2010.
The following summarizes the ratings.
GrafTech International Ltd.
Corporate Family Rating -- Ba2
Speculative Grade Liquidity rating -- SGL3
Probability of default rating -- Ba3 (from Ba2)
GrafTech Finance Inc.
Gtd sr sec revolving credit facility due 2013 -- Ba1 (LGD2,
Rating to be withdrawn upon completion of new revolver
Gtd sr sec revolving credit facility due 2010 -- Ba1 (LGD2,
24%) from Ba1 (LGD3, 36%)
The move to a positive outlook reflects our expectations that the company
will produce positive free cash flow over the next four quarters,
generate metrics supportive of a higher rating despite the possibility
of adding leverage (in conjunction with an acquisition or investments)
and maintain adequate liquidity. GrafTech is under levered for
its rating category after significant debt reduction in 2007-2009
that repaid all of its balance sheet debt, but the company is expected
to increase its leverage either by pursuing acquisitions and/or investment
opportunities, or recapitalizing its balance sheet. The rating
and outlook incorporates the expectation that the company could increase
net debt toward $500 million or more within the next two years.
If these potential investments or recapitialization are financed in a
manner consistent with management's stated financial policies, the
company could support a higher rating. The relative stabilization
and moderate growth of the global economy is expected to lead to a significant
rebound in demand for the company's graphite electrodes from the
anemic levels in 2009.
We view the refinancing of the company's revolver as a positive
for its liquidity and would expect to upgrade GrafTech's Speculative
Grade Liquidity (SGL) rating to SGL1 (from SGL3) upon completion of the
transaction. The company's liquidity is expected to be supported
by positive free cash flow in 2010, the new $230 million
revolving credit facility due 2013 and cash balances ($50 million
as of December 31, 2009). Additionally, the company
has an accounts receivable securitization program ($25 million)
and supply chain financing agreement ($50 million) that are renewed
on an annual basis. The new revolver will have an accordion feature
allowing commitments to be expanded to $340 million, subject
to bank approval. The new facility does have financial covenants
(Sr. Secured Leveraged Ratio and Coverage Ratio) that can limit
availability if earnings decline significantly from current levels.
The new revolver's issue rating was assigned in accordance with
Moody's loss given methodology and reflects the use of an expected
recovery rate for firm of 65% in the case of a distressed scenario
due to the all bank debt structure. (A recovery rate of 50%
was used in the past when GrafTech had both bank debt and notes in its
capital structure, however it repaid the remaining portion of its
notes in 2009.) As a result of the increase in recovery rate,
the Probability of Default (PDR) rating was moved to Ba3 from Ba2.
GrafTech has a relatively narrow product line, significant market
shares in the markets in which it competes and relatively low cost manufacturing
facilities located on four continents. However, the company
does have exposure to cyclical end markets (the steel industry) and to
volatile raw materials costs (needle coke accounts for approximately 40%
of the manufacturing cost of graphite electrodes) and energy costs,
which are not correlated with the price of steel. Limited leverage
in negotiating pricing with its suppliers and the fact that its customers
are large steel producers gives the company limited ability to control
its margins throughout the business cycle. GrafTech has recently
had a good track record of cash flow generation, producing meaningful
amounts of positive free cash flow in each of the last three years,
despite the economic downturn.
Moody's most recent announcement concerning the ratings for GrafTech was
on March 3, 2009, when GrafTech's speculative grade liquidity
rating was lowered to SGL-3 as a result of an expected decline
in the company's near-term cash flows.
The principal methodology used in rating GrafTech is Moody's Updated Global
Chemical Industry rating methodology, published in December 2009,
and available on www.moodys.com website in the Rating Methodologies
sub-directory under the Research & Ratings tab. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Rating Methodologies sub-directory
on Moody's website.
GrafTech International Ltd., headquartered in Parma,
Ohio, is a leading global manufacturer of graphite electrodes,
and other graphite products. Revenues were $659 million
for the LTM ended December 31, 2009.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Moody's moves GrafTech's outlook to positive; rates new revolver Ba1
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
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