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Rating Action:

Moody's upgrades Polypipe to B2 from B3; outlook positive

01 Nov 2010

Approximately GBP150 million rated debt affected

Frankfurt am Main, November 01, 2010 -- Moody's Investors Service has today upgraded the corporate family rating (CFR) of Pipe Holdings 2 Ltd ("Polypipe") to B2 from B3 and its probability-of-default rating (PDR) to B2 from Caa1. At the same time, the rating agency has assigned a provisional (P)B3 rating to the proposed issue of GBP150 million of senior secured notes by Pipe Holdings plc. The outlook on the ratings has been changed to positive from stable.

Moody's issues provisional ratings in advance of the final sale of securities and these ratings reflect Moody's preliminary credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign a definitive rating to the notes. A definitive rating may differ from the provisional rating.

RATINGS RATIONALE

"The upgrade of Polypipe's CFR to B2 was prompted by the group's implementation of adjustments to its financing structure, which, should the announced bond be successfully placed, results in both significantly reduced leverage and a term out of debt maturities," says Anke Rindermann, Moody's lead analyst for Polypipe. Specifically, following the restructuring measures, Polypipe is expected to achieve a debt/EBITDA ratio of below 4.5x and RCF/debt in the low teens in 2010 which positions the company solidly in the B2 rating category. The rating action also reflects a further stabilisation of operating performance, despite a continued challenging market environment in the construction industry and still subdued demand for plastic pipe systems. The upgrade in the Probability of Default rating by two notches to B2 from Caa1 acknowledges that the company has moved further away from default, making asset recovery rates less of a short term driving factor. Thus, Moody's is applying its standard 50% family recovery rate to Polypipe instead of the previously used 65% rate.

The positive rating outlook is based on Moody's expectation that the rating could be upgraded over the next 12-18 months should the agency gain more visibility on a potential recovery of the UK construction market beyond 2011. As the group's profitability is still well below historic levels, we see upside potential for the ratings should a further recovery in particular in the higher margin residential volumes enable Polypipe to achieve further enhancements in its operating performance. Profitability improvements should in particular help to increase interest coverage ratios, as indicated by (EBITDA-Capex)/Interest moving towards 1.5x as current levels of just above 1x are at this point in time a major rating constraint.

The (P)B3 rating (LGD 4, 64%) assigned to the GBP150 million senior secured notes is one notch below the B2 CFR. The instrument reflects its junior ranking behind the sizeable proportion of a GBP30 million super senior RCF. The RCF is guaranteed on a senior basis by the majority of the group's operating subsidiaries representing at least 80% of consolidated EBITDA and assets and benefits from a first-lien pledge over the clear majority of group assets. The senior secured notes are secured by the same asset base though on a second-lien basis relative to the RCF as reflected in the notching. The senior secured notes benefit as well from the senior guarantees provided by most of the operating companies.

Moody's notes the gradual improvements in operating performance realised by Polypipe over recent quarters, against a backdrop of demand levels for piping systems recovering only very modestly and remaining well below historical levels. This has ultimately resulted in intensifying pricing pressure as competitors try to preserve market share. However, cost reduction initiatives and tight management of volatile input factors have enabled the group to achieve improvements in operating profitability since 2009, as indicated by (i) an operating margin of 4.4% as of June 2010, compared with 4% in the prior year; and (ii) continued positive free cash flow generation.

Moody's expects market conditions to remain challenging for Polypipe, driven by anticipated government spending cuts, which will negatively affect the group's commercial business, in particular. However, the rating also factors in a further gradual recovery, albeit from low levels, in Polypipe's higher-margin residential division. In Moody's view, this should enable the group to at least sustain current profitability levels over 2011 and achieve further gradual improvements thereafter.

However, the rating remains constrained by Polypipe's limited absolute scale, as evidenced by: (i) sales of GBP268 million for the last 12 months ending September 2010; (ii) the group's strong focus on the UK construction market; (iii) the challenges Polypipe faces in managing volatile input costs, particularly for plastic polymers, which may negatively impact profitability levels if not passed on in a timely fashion; and (iv) the competitive and concentrated mature market in which the group operates. In terms of financial metrics, and apart from the clear improvement in leverage, Moody's notes that Polypipe's interest coverage remains weak because the group's profitability is still below historical levels and because of the higher coupon on the new bond.

Polypipe's rating could benefit from upward pressure if the group were to achieve: (i) an adjusted retained cash flow/adjusted debt ratio clearly above 10%; (ii) interest coverage, in terms of (EBITDA-Capex)/interest expense, trending towards 1.5x; and (iii) continued positive free cash flow generation.

Downward pressure would likely be exerted on the rating if Polypipe's operating performance and cash flow generation were to deteriorate substantially, resulting in a weakening of existing credit metrics, such that: (i) the group's adjusted total debt/EBITDA ratio increases to above 5.0x; (ii) its (EBITDA-Capex)/interest expense ratio moves to 1.0x; or (iii) its free cash flow generation enters negative territory.

Upgrades:

..Issuer: Pipe Holdings 2 Ltd

....Probability of Default Rating, Upgraded to B2 from Caa1

....Corporate Family Rating, Upgraded to B2 from B3

Assignments:

..Issuer: Pipe Holdings plc

....Senior Secured Regular Bond/Debenture, Assigned a range of 64 - LGD4 to (P)B3

Outlook Actions:

..Issuer: Pipe Holdings 2 Ltd

....Outlook, Changed To Positive From Stable

..Issuer: Pipe Holdings plc

....Outlook, Changed To Positive From Stable

Moody's last rating action on Polypipe was implemented on 11 May 2010, when the group's B3 CFR and Caa1 PDR were affirmed and its outlook was changed to stable from negative.

The principal methodology used in this rating was the "Global Building Materials Rating Methodology", published in July 2009.

Based in Doncaster, England, Polypipe manufactures a wide range of plastic pipe systems, predominantly for the UK construction market. In the last 12 months ending September 2010, the group generated revenues of GBP268 million.

REGULATORY DISCLOSURES

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 maintaining a credit rating.

The rating has been disclosed to the rated entity or its designated agents and issued with no amendment resulting from that disclosure.

Moody's Investors Service may have provided Ancillary or Other Permissible Service(s) to the rated entity or its related third parties within the three years preceding the Credit Rating Action. Please see the ratings disclosure page www.moodys.com/disclosures on our website for further information.

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.

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

Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany

Moody's upgrades Polypipe to B2 from B3; outlook positive
No Related Data.
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