New York, January 25, 2011 -- Moody's Investors Service assigned a Ba1 rating to Steelcase's new
$250 million senior unsecured notes and upgraded its speculative
grade liquidity rating to SGL 2 from SGL 3. Other ratings,
including the Ba1 CFR and PDR were affirmed as was the Ba1 rating on the
existing $250 million notes.
Proceeds from the new $250 million notes are expected to be used
to repay the existing $250 million notes when these notes mature
in August 2011. In the meantime, we expect Steelcase to invest
the proceeds in short term treasury securities. The rating on the
existing notes will be withdrawn when repaid.
"Due to the severe contraction of capital spending in 2009,
Steelcase aggressively reduced its cost structure and diversified its
business to focus more on healthcare, education, and government,"
said Kevin Cassidy, Senior Credit Officer at Moody's Investors
Service. As the economy continues to gradually improve, the
office furniture industry has also started to stabilize leading Steelcase
to report quarterly increases in revenue, earnings, and operating
cash flow for the first nine months of fiscal 2011. We expect that
office furniture industry trends will further improve in calendar 2011.
A view shared by the Business and Institutional Furniture Market Association,
which recently increased its 2011 forecast of U.S. office
furniture production to 8.3% from 6%.
"While weakness in commercial construction is likely to remain a
drag on project-related business for the foreseeable future,
we believe the high national vacancy rate—which stood at 17.5%
in the third quarter of 2010 — suggests the initial recovery may
be driven more by the absorption of existing space and is less dependent
on new office construction," Cassidy added.
The upgrade of the speculative grade liquidity rating to SGL 2 from SGL
3 reflects the improved maturity profile and our expectation of continued
higher operating cash flow in the near to mid-term. Excluding
any gain on sale, free cash flow is expected to be between $10
million and $20 million in fiscal 2012. The SGL upgrade
also reflects the company's improved covenant cushion.
The Ba1 rating for the unsecured notes reflects both the overall probability
of default of the company, to which Moody's assigns a PDR of Ba1,
and a loss given default assessment of LGD 4, 58%.
The notes and $125 million revolving credit facility are unsecured,
but the $45 million aircraft financing is secured. The notes
and revolver are not guaranteed by any operating subsidiaries.
The Ba1 corporate family rating reflects our expectation that the office
furniture market will continue to improve and that the company's
cost rationalization and product diversification efforts towards healthcare,
education and government will help it capitalize on this improvement.
Credit metrics are expected to get better as the office furniture market
improves. Moody's believes that Steelcase needs to have stronger
than average credit metrics because of the earnings and cash flow volatility.
The company's geographic diversification also benefits the rating
as does the company's strong market share and scale with revenue
around $2.4 billion. Steelcase's high operating
leverage and significant earnings/cash flow volatility constrain the rating.
For example, while improving recently, adjusted EBITDA and
adjusted operating cash flow (CFO excluding working capital changes) decreased
62% and 85%, respectively, from fiscal 2008
to fiscal 2010. Steelcase consumed cash in fiscal 2009 and 2010
on an adjusted basis. In fiscal 2009, the cash consumption
was principally driven by relatively high amounts of capital expenditures
and dividends, while in fiscal 2010 the cash consumption was primarily
due to soft earnings. Moody's believes the consumption of
cash is generally inconsistent with an investment grade rating.
The rating is also constrained by the lingering macro economic uncertainty
highlighted by the high unemployment rate and sluggish economic recovery.
The stable outlook reflects Moody's belief that Steelcase's
ongoing revenue diversification strategies and cost rationalization efforts
combined with stabilizing industry trends should enable it to gradually
improve its operating performance, credit metrics and liquidity
position. For example, leverage, which is currently
over 3.5x, is expected to decrease by more than half a turn
next year, with a similar improvement anticipated in interest coverage,
which is currently just over 2x. Cash flow metrics are also expected
The outlook could go back to negative if the expected improvement in the
office furniture market and credit metrics do not materialize in the near
to mid-term. A prolonged consumption of cash or a sudden
significant deterioration in earnings could spark a downgrade.
An upgrade is not likely in the foreseeable future because of the severe
volatility in earnings and cash flows. A sustained improvement
in credit metrics could lead us to consider a positive outlook.
$250 million senior unsecured notes at Ba1 (LGD 4, 58%);
Speculative Grade Liquidity rating to SGL-2 from SGL-3;
Ratings affirmed/assessments revised:
Corporate family rating at Ba1;
Probability of default rating at Ba1;
$250 million 6.5% senior unsecured notes, due
August 2011 at Ba1 (LGD 4, 58% from LGD 4, 61%)
Moody's subscribers can find further details in the Steelcase's
Credit Opinion published on Moodys.com.
The last rating action was on October 14, 2010, where Moody's
stabilized Steelcase's outlook and affirmed all ratings.
The principal methodologies used in this rating were the Global Consumer
Durables rating methodology published in October 2010 and Loss Given Default
for Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Other methodologies and factors that may have been considered in the process
of rating this issuer can also be found on Moody's website.
Steelcase is a designer, marketer and manufacturer of office furniture
headquartered in Grand Rapids, Michigan. The company sells
its products through various channels including independent dealers,
company-owned dealers and directly to end users and governmental
units. The company has two reportable segments: North America
and International. Revenues for the last twelve months ended November
2010 were $2.4 billion.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's rates Steelcase's unsecured notes Ba1 and upgrades liquidity rating; outlook remains stable
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