Bangkok--8 Mar--Moody's Investors
Moody's Investors Service today upgraded Grohe Holding GmbH's (Grohe) Corporate Family Rating (CFR) to B2 from B3 and Probability of Default Rating (PDR) to B1 from B3. Concurrently, Moody's upgraded to B2 from B3 the rating on Grohe's outstanding senior secured Notes, and to B3 from Caa1 the EUR335 million senior Notes (due in October 2014). Moody's also assigned a (P)B2 rating to Grohe's new EUR400 million senior secured Notes (due in 2017/ 2018) announced today. The outlook on all ratings is stable.
RATINGS RATIONALE
The upgrade reflects strong operating performance of Grohe supported by the company's successful strategy in its key products and markets as well as an improved debt maturity profile. As part of the partial refinancing of the capital structure announced today, Grohe will issue a new five year EUR150 million revolving credit facility (RCF) to replace the existing EUR150million RCF maturing in 2012. Grohe will also issue EUR400 million of new senior secured notes due in 2017/2018 to refinance EUR400 million of the existing EUR800 million senior secured floating rate notes maturing in 2014. The floating-rate tranche of the new notes matures in September 2017, six months before the fixed-rate tranche due in March 2018.
"Against the backdrop of stabilising but still challenging trading conditions, Grohe has achieved strong growth in sales and EBITDA and substantial de-leveraging from 2009 level, which has exceeded Moody's expectations," says Tanya Savkin, Moody's lead analyst for Grohe. "The company's leverage still remains high, at 6.9x as of the end of 2010 (Moody's adjusted). However it is offset by solid EBITDA margins which have remained stable at around 20-21% in the past three years. The refinancing plan undertaken today will remove the uncertainty about the RCF maturing in January 2012 and improve the maturity profile of the company, which together support the B2 CFR".
In 2010 Grohe reported a 19% growth in sales and 29% growth in normalised EBITDA, reversing the negative trend seen in 2009, when the company's CFR was downgraded from B2 to B3.The strong performance demonstrates the success of the company's efforts to develop strong portfolio of new products, expand its geographical and distribution reach as well as improve productivity and reduce costs. However, Moody's notes the group's exposure to raw material prices which will remain a key constraint for the company's ratings.
The voluntary tender offer for shares in Joyou AG in China announced on14 February 2011 will strengthen the company's position in the fast-growing Asian markets and provide further geographical diversification away from its key region of Europe. As a result Grohe's ownership of Joyou AG will increase to at least 30%.The acquisition, subject to regulatory approvals, will be made through Grohe Asia AG, a joint-venture which is outside of the restricted group.
Moody's acknowledges the group's positive cash flow generation throughout 2010, before payment of the EUR54.8 million European Commission fine in September 2010. This is due to improved performance and reduced restructuring costs compared to previous years and has also helped to build additional liquidity. The new capital structure includes a single covenant of minimum EBITDA in the RCF, and no debt repayment before 2014.
The five-year RCF has a springing maturity feature leading to potentially accelerated re-financing date, if the 2014 notes have not been refinanced three months prior to their maturity date. The PDR of B1, one notch above CFR of B2, reflects the covenant-lite nature of the structure leading to the assumption of 35% recovery rate.
The stable outlook reflects Moody's expectations that Grohe is well positioned for cyclical recovery in the water technology products market and will continue to maintain stable growth in sales and profitability.
While Moody's believes that a rating upgrade is unlikely in the short- to-medium term due to Grohe's high leverage, positive rating pressure could develop if there is a continued improvement in the company's profitability leading to EBITA/interest increasing towards 2.5x; gross debt/EBITDA approaching 5.0x; or free cash flow / debt at around 6%.
Negative rating pressure could develop if the company fails to maintain its gross debt/EBITDA ratio below 7.0x; EBITA/Interest ratio falls towards 1.5x; or if free cash flow / debt falls towards 2%.
The principal methodology used in this rating was Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 and Global Consumer Durables, published in October 2010.
Headquartered in D?sseldorf, Germany, Grohe Holding GmbH is a leading single-brand manufacturer and supplier of sanitary fittings for bathrooms and kitchens. Grohe operates six production facilities, which are located in Germany, Portugal, Canada and Thailand. In 2010, the company reported revenue of EUR980 million and Normalised EBITDA of EUR200 million.
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