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Global Credit Research - 22 Dec 2010
New York, December 22, 2010 -- Moody's Investors Service changed Brunswick Corporation's ("Brunswick")
rating outlook to positive from stable due to our expectation that its
credit profile and earnings will continue to improve over the near to
mid-term despite continued softness in the overall marine industry.
At the same time, all ratings were affirmed including the B2 CFR
and PDR, Ba3 secured notes, Caa1 unsecured notes and SGL 1
"We believe Brunswick's continuing strong liquidity profile,
vastly improved cost structure, enhanced health of its dealership
network and strong product portfolio should enable it to capitalize on
nascent signs of possible marine industry improvement," said
Kevin Cassidy, Senior Credit Officer at Moody's Investors
Service. Brunswick's strategy of ensuring the viability of
its dealer network by decreasing 2009 production paid dividends in 2010
as the company had to significantly increase its manufacturing to restock
its dealer's inventory levels. On top of this, over
the past couple of years, Brunswick has materially improved its
operating efficiency through numerous restructuring activities,
eliminating seven boat brands and closing 17 boatbuilding facilities since
2006. The combined effect of these actions has been to increase
operating profit by about $350 million in the first nine months
of 2010 (excluding restructuring), on a revenue increase of $560
million. Despite the improvements so far in 2010, we expect
Brunswick to lose money in the fourth quarter because of typical seasonal
fluctuations and additional planned downtime in some fiberglass boat plants
beyond its normal holiday shutdown. We believe Brunswick is expanding
its downtime in an effort to manage its production of fiberglass boats
and dealer inventory ahead of the selling season. The fourth quarter
loss is not expected to be as high as the $120 million Q4 2009
loss, but more than the $40 million Q4 2008 loss.
The positive outlook reflects Moody's expectation that overall marine
retail demand will continue to show modest improvements in the near to
mid-term and that operating margins and credit metrics will meaningfully
improve next year mainly because of increased cost efficiencies and some
volume improvement. Our expectation of a slight improvement in
discretionary consumer spending, especially for higher end consumers,
and modest GDP growth between 2.5% and 3.5%
is also reflected in the positive outlook as is our belief that Brunswick
will maintain a strong liquidity profile.
In order for an upgrade to be considered in the near term, marine
industry units need to stay at around 135,000, demand for
fiberglass boats needs to show signs of improvement and worldwide financial
markets need to continue to stabilize. If industry units fell below
this amount, the rating could still be upgraded over the longer
term assuming Brunswick's cost rationalization efforts reap the
benefits we expect and Brunswick maintains its strong liquidity profile.
Because of the severe volatility over the last few years, Brunswick's
credit metrics need to be stronger than other similarly rated consumer
durable companies. Credit metrics necessary for an upgrade to be
considered would be financial leverage approaching 4x, strong mid
single digit operating margins, interest coverage approaching 2x
and retained cash flow/net debt in the mid to high single digits.
While not considered likely in the near term, if the company's
liquidity profile were to materially decrease or if the sovereign debt
crises were to rapidly expand and put pressure on worldwide financial
markets, the long term rating and liquidity rating could be downgraded.
Significant erosion in the operating performance of the company's dealership
network or the floorplan lending facility could also trigger a downgrade.
The outlook could be stabilized or possibly changed to negative if marine
retail demand in 2011 meaningfully declines without signs of a recovery.
Brunswick's B2 corporate family rating reflects the severe and sudden
volatility in demand for marine related products over the last few years.
The ensuing dramatic revenue and earnings decline is incorporated into
the rating, but so is our expectation of operating improvements
in the near to mid-term as the company continues to adjust its
business profile to address the weak marine industry. Credit metrics
are expected to improve from their current levels with financial leverage
potentially approaching 4x by the end of 2011 and EBITA margins increasing
to the mid to high single digits. A critical component of the B2
corporate family rating is Brunswick's strong liquidity profile.
Other factors supporting the rating are the improved health of its dealership
network, having a management team experienced in the marine industry
and having a joint venture agreement with General Electric Capital Corporation
for its floorplan financing.
The following ratings were affirmed/assessments revised:
Corporate family rating at B2;
Probability of default rating at B2;
$575 million senior unsecured notes due 2013-2027 ($442
million outstanding) at Caa1 (LGD 5, 88% from 89%);
$350 million senior secured notes due 2016 at Ba3 ($340
million carrying value) (LGD 2, 29% from LGD 2, 23%);
Speculative grade liquidity rating at SGL 1
Moody's subscribers can find further details in the Brunswick Credit Opinion
published on Moodys.com.
The last rating action was on May 24, 2010, where Moody's
affirmed all ratings and revised the outlook to stable from negative.
The principal methodologies used in this rating were the Global Consumer
Durables published in October 2010, and the Loss Given Default for
Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Brunswick is headquartered in Lake Forest, Illinois. The
company manufactures marine engines, pleasure boats, bowling
capital equipment and fitness equipment, and operates retail bowling
centers. Sales for the twelve months ended September 2010 approximated
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and 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 maintaining
a credit rating.
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 revises Brunswick's outlook to positive; all ratings affirmed
250 Greenwich Street
New York, NY 10007
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