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Rating Action:

Moody's raises VAC's Rating to Caa1, outlook positive

15 Jun 2010

Approximately EUR55 million rated debt affected

Frankfurt, June 15, 2010 -- Moody's Investors Service today raised the Corporate Family Rating ('CFR') and Probability of Default Rating ('PDR') of VAC Finanzierung GmbH ('VAC' or 'the company') to Caa1 from Ca. At the same time the senior secured notes due 2016 have been upgraded to Caa2 from Ca. The outlook has been changed to positive from negative.

The rating action was prompted by (i) the implementation of a financial restructuring resulting in a considerably lower debt load and reduced interest payments, (ii) the amendment of the senior bank debt which resulted in an adequate headroom under financial covenants going forward and (iii) recently improving operating performance on the back of increased demand for magnetic products which together with benefits from the financial restructuring should enable VAC to clearly improve credit metrics going forward.

Although point in time metrics are only in line with the Caa1 rating category, the positive outlook reflects Moody's expectation that VAC will sustain recent performance improvements shown in the first months of 2010 through improved order intake and continued tight cost management. The ratings could therefore be upgraded over the next 6 to 12 months should VAC manage to improve credit metrics in line with the requirements for the single B rating category as indicated by Debt/EBITDA moving towards 6 times in 2010 and below thereafter, EBITA-margins increasing above the mid single digits and a return to positive free cash flow generation. The positive outlook also incorporates Moody's expectation that VAC will maintain adequate liquidity headroom, including flexibility under its revised covenants.

The ratings could come under downwards pressure should VAC fail to maintain adequate liquidity or if expected break-even to positive free cash flow generation is negatively impacted by a deterioration in operating margins resulting in leverage not improving towards 6 times over the coming quarters. Also, any material expansion activity through largely debt financed acquisitions would also result in downward pressure on the rating.

In H2 2009, One Equity Partners, the sole shareholder of VAC, bought back about EUR80 million of face value of the senior secured notes at distressed pricing levels. This buyback was determined as a distressed exchange and a limited default by Moody's in October 2009 and resulted in a downgrade of VAC's ratings to Ca. These notes have been swapped into equity-like instruments recently, reducing the outstanding amount of these notes to EUR55 million. In addition, a EUR68 million shareholder loan was also swapped into an equity-like instrument. Furthermore, the financial restructuring also encompassed amendments to VAC's credit agreement that (among other things) reduced the amount of the formally EUR40 million revolving credit facility to EUR30 million, set new financial covenants, waived all existing defaults, and increased the interest rate.

The upgrade of the corporate family rating reflects the material reduction in financial leverage following the aforementioned restructuring of VAC's debt obligations. Following the exchange of senior secured notes into equity, Moody's adjusted debt reduced by about 23% on a pro forma 2009 basis. The upgrade also reflects the company's improved liquidity profile as cash interest payments will be clearly reduced going forward and as the amendment includes increased headroom under financial covenants. The liquidity profile is characterized by EUR17 million on-balance sheet cash as of March 2010 and full availability under the EUR30 million revolving credit facility, which should be sufficient provided that the company will continue to generate at least break-even free cash flows which requires a material improvement in operating cash flow generation and an only modest increase in working capital requirements, which is a challenge that needs to managed in the short term. Furthermore, the upgrade also considers the more benign business conditions indicated by strong order intake and a return to positive operating cash flow generation (before working capital movements) in Q1 2010, which we assume to be continued over the coming quarters.

Notwithstanding these positives, the rating also considers that leverage is still high even after the financial restructuring. Given expectations for limited near-term positive free cash flow generation, it is critical that the company expands EBITDA levels to improve its credit metrics further, which might be challenging as the economic environment remains fragile and as input costs have started to rise again. Upcoming labor negotiations in H2 2010 will also be critical to support further margin improvements as the majority of personnel expenses is still related to the group's German operations.

Upgrades:

..Issuer: VAC Finanzierung GmbH

....Probability of Default Rating, Upgraded to Caa1 from Ca

....Corporate Family Rating, Upgraded to Caa1 from Ca

....Senior Secured Regular Bond/Debenture, Upgraded to Caa2 from Ca

Outlook Actions:

..Issuer: VAC Finanzierung GmbH

....Outlook, Changed To Positive From Negative

The last rating action was implemented on 7 October 2009, when Moody's assigned a Ca/LD probability of default rating to VAC following a distressed exchange transaction, a deemed default event under Moody's policies.

The principal methodology used in rating VAC was Moody's Global Manufacturing Industry methodology, published in December 2007 and available on www.moodys.com 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.

Headquartered in Hanau, Germany, Vacuumschmelze GmbH & Co KG has a solid and well established market position in the design and manufacturing of magnetic products. In 2009, the company generated revenues of EUR234 million.

Paris
Eric de Bodard
Managing Director
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Anke Rindermann
Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's raises VAC's Rating to Caa1, outlook positive
No Related Data.
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