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I AGREE
17 Dec 2010
Approximately EUR55 million of rated debt instruments affected
Frankfurt am Main, December 17, 2010 -- Moody's Investors Service today upgraded the Corporate Family Rating
("CFR") and the Probability of Default Rating of VAC Finanzierung
GmbH ("VAC" or "the company") to B3 from Caa1.
The rating of the EUR135 million Senior Secured Notes maturing 2016 (of
which EUR55 million are outstanding) were upgraded to Caa1 (LGD4,
63%) from Caa2 (LGD4, 64%). The outlook was
changed to stable from positive.
RATINGS RATIONALE
"The upgrade of the CFR to B3 acknowledges the recent rebound in
order intake across all divisions resulting in strong improvements in
the company's operating performance and credit metrics in line with
our expectation for the lower single B rating category. The upgrade
also considers improved end-market conditions and favorable global
demand trends for magnetic products which should enable VAC to at least
sustain recent improvements" said Anke Rindermann, Moody's
lead analyst for VAC. At the same time, Moody's notes
that raw material prices for key input factors such as nickel, cobalt
and rare earth metals have increased significantly over 2010, however
automatic pass-on clauses in the majority of its contracts enabled
the group to recover most of the volatility. In addition,
we noted favorably that VAC has negotiated a return into the regular tariff
agreement for its German operations, by thus eliminating the risk
of extended labor negotiations and potential disputes following the maturity
of the company's special tariff agreement per year end 2010.
This will, however, also lead to an increase in the company's
cost base potentially reducing the pace of further margin improvements
going forward.
On the back of a cyclical recovery with improved order intake across all
major end customer industries, VAC was able to clearly turnaround
operating performance as indicated by sales growth of 46% while
EBITDA more than doubled in the first nine months of 2010 compared to
the same period last year. Subsequently, leverage in terms
of Debt/EBITDA reduced to clearly below 6 times, in line with Moody's
requirements for the B3 rating category. We note however,
that due to a significant working capital build up on the back of higher
volumes and increased raw material prices, free cash flow generation
is expected to be moderate for 2010.
The stable outlook reflects Moody's expectations that the recent
performance improvements are sustainable with VAC being able to prudently
manage its volatile input cost exposure, enabling the company to
continue positive free cash flow generation, albeit at a relatively
low level. In addition, Moody's assumes that VAC preserves
its adequate liquidity cushion including sufficient headroom under financial
covenants and that it proactively addresses a refinancing of the RCF which
matures in 2012 and which is currently undrawn.
More fundamentally, the B3 CFR considers (i) the group's solid
market positioning as an integrated manufacturer of magnetic products
with state of the art, customized production processes and technological
expertise in niche market segments for magnetic products, (ii) its
broad customer diversification across various industries, with long-standing
and sole supplier relationships with key customers, (iii) good segmental
diversification across market segments and broad product diversity,
as well as (iv) an adequate liquidity profile following the financial
restructuring including ample headroom under financial covenants.
At the same time, the rating is constrained by (i) the small absolute
scale of the group, evidenced by a revenue base of around EUR315
million in the last twelve months ending September 2010, (ii) a
concentration of sales on the European market, where VAC generates
about 70% of sales and (iii) a still highly leveraged capital structure,
even after the financial restructuring, although we note that about
40% of indebtedness results from Moody's adjustments related
to pensions and operating leases.
Moody's would consider a further rating upgrade if VAC was able to establish
a track record of material free cash flow generation and sustain a gross
debt/ EBITDA ratio below 5x with EBITA-Interest cover above 2 times.
An upgrade would also require visibility regarding a timely refinancing
on the back of expected limited free cash flow generation.
Negative rating pressure would build should VAC not be able to generate
at least break even Free Cash Flow or should current financial ratios
not be sustained as indicated by Debt/EBITDA moving towards 6x and EBITA/Interest
Coverage towards 1.5x.
Upgrades:
..Issuer: VAC Finanzierung GmbH
.... Probability of Default Rating,
Upgraded to B3 from Caa1
.... Corporate Family Rating, Upgraded
to B3 from Caa1
....Senior Secured Regular Bond/Debenture,
Upgraded to Caa1, LGD4, 63% from Caa2, LGD4,
64%
....Senior Secured Regular Bond/Debenture,
Upgraded to Caa1, LGD4, 63% from Caa2, LGD4,
64%
Outlook Actions:
..Issuer: VAC Finanzierung GmbH
....Outlook, Changed To Stable From
Positive
The principal methodology used in this rating was the "Global Manufacturing
Industry" Methodology published in December 2007 and its "Loss Given
Default for Speculative-Grade Non-Financial Companies in
the U.S., Canada and EMEA" methodology, published
in June 2009.
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 the last twelve months ending
September 2010, the company generated revenues of EUR315 million.
REGULATORY DISCLOSURES
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
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a credit rating.
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Moody's adopts all necessary measures so that the information it uses
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Please see ratings tab on the issuer/entity page on Moodys.com
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The date on which some Credit Ratings were first released goes back to
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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
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's upgrades VAC's corporate family rating to B3 -- outlook stable
No Related Data.
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