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Related Issuers
Rating Action:

Moody's upgrades VAC's corporate family rating to B3 -- outlook stable

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 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
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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