Recovery Report: Constellium Holdco B.V. Recovery Rating Profile Recovery Analyst: Franck Rizzoli, London (44) 20-7176-3934; Franck_Rizzoli@standardandpoors.com Primary Credit Analyst: Tatjana Lescova, Paris (33) 1-4420-7327; tatjana_lescova@standardandpoors.com Table Of Contents Overview Legal And Structural Considerations Issuer Credit Rating Rationale Recovery Analysis Related Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 27, 2012 1
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 2014. 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/-- 500 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, 2012. Maturity Legal And Structural Considerations Capital structure WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 27, 2012 2
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 WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 27, 2012 3
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, 2007. 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, 2012. 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. WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 27, 2012 4
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, WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 27, 2012 5
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 20 2008 Debt Recovery For Creditors And The Law Of Insolvency In The Netherlands, July 23, 2007 Additional Contact: Industrial Ratings Europe; CorporateFinanceEurope@standardandpoors.com WWW.STANDARDANDPOORS.COM/RATINGSDIRECT JUNE 27, 2012 6
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