Constellium Holdco B.V. Recovery Rating Profile

Transcription

1 Recovery Report: Constellium Holdco B.V. Recovery Rating Profile Recovery Analyst: Franck Rizzoli, London (44) ; Primary Credit Analyst: Tatjana Lescova, Paris (33) ; Table Of Contents Overview Legal And Structural Considerations Issuer Credit Rating Rationale Recovery Analysis Related Criteria And Research JUNE 27,

2 Recovery Report: Constellium Holdco B.V. Recovery Rating Profile Overview We are initiating our recovery analysis on Netherlands-based downstream aluminum producer Constellium Holdco B.V. (Constellium; B/Stable/--). Our simulated default scenario assumes that falling revenues from a deteriorating operating environment, combined with the group's first-ranking debt, would lead to a payment default. In our view, Constellium would be reorganized as a going concern in the event of a default, which we project in We believe that our estimated enterprise value would result in meaningful (50%-70%) recovery prospects for senior secured debtholders, with recovery prospects at the high end of this range. Table 1 Constellium Holdco B.V. Credit Profile Corporate credit rating Estimated gross enterprise value at default B/Stable/ mil. Year of default 2014 Facility/issue Outstanding principal at default (unit/currency) Issue rating Recovery rating Expected recovery (%) Factoring lines 100 mil. NR NR N/A 2016 Asset-backed loan $100 mil. NR NR N/A 2015 $200 mil. senior secured term loan $200 mil. B 3 50%-70% 2018 NR--Not rated. N/A--Not applicable. Note: All ratings are as of June 27, Maturity Legal And Structural Considerations Capital structure JUNE 27,

3 Security and guarantee package The term loan is also secured by share pledges over the main subsidiaries of the group, pledges over bank accounts, and intercompany loans. We consider the security package to be relatively weak. Documentation/covenants The term loan benefits from a set of financial and nonfinancial covenants. There is only one financial maintenance covenant: A consolidated net secured leverage ratio set at a maximum of 2.25x until June 30, 2013, and 2.00x afterward. The documentation includes limitations on sale and leasebacks, mergers and acquisitions, sales of assets, and transactions with affiliates. It also specifies permitted payments if the consolidated leverage ratio is less than 1.0x and for an amount not exceeding the available free cash flow. It also specifies that if leverage is less than 1.5x, the maximum amount shall not exceed $25 million; and if the leverage is above 1.5x, the maximum amount shall not exceed $15 million). There is a restriction on the incurrence of additional debt. However, further debt can be raised via permitted baskets, a general basket of $100 million, an overdraft basket of up to $15 million (which, if used, we would consider JUNE 27,

4 prior-ranking debt). There is also a permitted lien basket (not constituting collateral) not exceeding $35 million that, if used, we would consider prior ranking. The documentation includes a clause allowing Constellium to increase the term loan by $100 million (termed the incremental facility). The group can only raise this incremental facility if the consolidated secured net leverage ratio post-increase is below or equal to the leverage at the closing of the refinancing. In addition, there is a change of control clause and an equity cure clause. The latter can be used no more than six times during the life of the term loan and within a period of four quarters. That said, there shall be at least two quarters in which the cure right is not exercised. There is also an excess cash flow clause and a cross-default clause (for any amount above $30 million). The documentation permits Constellium to raise and draw a receivables securitization facility. If used, this facility would erode the enterprise value available for creditors at default. The intercreditor agreement states the prior ranking of the asset-backed loan (ABL) over the term loan. It also specifies that the group shall keep a liquidity buffer of $50 million (cash plus unfunded availability under the factoring line and the ABL). Jurisdictional/insolvency regime issues Constellium is registered in The Netherlands, but its main end markets are Germany (28% of group sales in 2011) and the U.K. (19%). We consider all the applicable insolvency jurisdictions to be comparatively friendly regimes for creditors, especially for secured lenders. However, we recognise that the group's multijurisdictional exposure could affect the validity and enforceability of some of the guarantees, as well as the timeliness of recoveries. For further information on the relationship between insolvency proceedings and our recovery ratings, see "COMIs In EU Insolvency Proceedings And Their Bearing On Standard & Poor's Recovery Ratings," published July 8, 2008, on RatingsDirect on the Global Credit Portal. For our views on the effect of the French insolvency regime on recoveries, see "Debt Recovery For Creditors And The Law Of Insolvency In The Netherlands," July 23, Issuer Credit Rating Rationale See Standard & Poor's research update titled "Downstream Aluminum Producer Constellium Holdco B.V. Assigned 'B' Long-Term Rating; Outlook Stable," published May 25, Recovery Analysis Table 2 Constellium Holdco B.V. Stressed Valuation Simulated default assumptions Simplified waterfall Year of default 2014 Gross enterprise value at default 500 mil. 2012e EBITDA 170 mil. Administrative costs 40 mil. EBITDA decline to default 42% Net enterprise value 460 mil. JUNE 27,

5 Table 2 Constellium Holdco B.V. Stressed Valuation (cont.) EBITDA at default 100 mil. Priority claims 330 mil. Implied enterprise value/ebitda multiple 5.0x Net value available to creditors 130 mil. LIBOR/margin rise* 200 bps Senior Secured Term Loan 158 mil. Recovery expectation 50%-70% Note: All debt amounts include six months of prepetition interest. e--estimated. bps--basis points. Simulated default scenario To calculate recoveries, we simulate a default scenario. In our hypothetical scenario, we value Constellium on a going-concern basis. Due to the cyclicality of Constellium's business and the group's high operating leverage, we believe that a default would most likely occur in 2014, because of falling revenues from a deteriorating operating environment combined with the group's significant first-ranking debt. Valuation We value Constellium using a going-concern approach, supported by Constellium's strong market positions, well-established brands, and geographic diversity. The valuation also takes into account our assessment that, in default, the business would retain more value as a going concern rather than through liquidation. Using a combination of market multiple and discounted cash flow valuations, we calculate a stressed enterprise value of 500 million at our hypothetical point of default in 2014, equivalent to 5x EBITDA. To calculate recovery prospects, we deduct priority obligations that we estimate at 370 million from the stressed enterprise value. These obligations comprise enforcement costs, as well as a proportion of pension liabilities and Constellium's structurally/contractually senior debt (that is, the factoring lines and the ABL). This leaves about 130 million of residual value for debtholders. Outcome At default, we assume about 158 million of senior secured facilities outstanding (including six months of prepetition interest). We believe that lenders of the senior secured loan would achieve meaningful (50%-70%) recoveries, equating to a recovery rating of '3', although debt coverage would be at the high end of this range. Alternate scenarios Downside. We see some downside to the rating. The recovery rating on the notes is constrained by their junior position to the $100 million ABL and an important factoring program located at the level of various subsidiaries. The recovery rating is also constrained by the loan's weak security package, comprising mostly intangible assets (pledges over subsidiaries' shares, bank accounts, and intragroup loans) and the existence of material debt baskets allowed under the notes' documentation. Upside. We do not see any rating upside at present. Related Criteria And Research All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated. Downstream Aluminum Producer Constellium Holdco B.V. Assigned 'B' Long-Term Rating; Outlook Stable, May 25, JUNE 27,

6 2012 Criteria Guidelines For Recovery Ratings On Global Industrials Issuers' Speculative-Grade Debt, Aug. 10, 2009 COMIs In EU Insolvency Proceedings And Their Bearing On Standard & Poor's Recovery Ratings, July 8, 2008 Update: Jurisdiction-Specific Adjustments To Recovery And Issue Ratings, June Debt Recovery For Creditors And The Law Of Insolvency In The Netherlands, July 23, 2007 Additional Contact: Industrial Ratings Europe; JUNE 27,

7 Copyright 2012 by Standard & Poor's Financial Services LLC. All rights reserved. No content (including ratings, credit-related analyses and data, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at JUNE 27,