TET-S&P affirms Bombardier Recreational Products at 'B+'

Tue Nov 6, 2012 4:48pm EST
 
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Overview
     -- Valcourt, Que.-based recreational products manufacturer Bombardier 
Recreational Products Inc. (BRP) plans to issue new bank debt to refinance 
existing debt and pay a special C$375 million dividend.
     -- We are assigning our 'B+' issue-level rating and '4' recovery rating 
to the company's proposed US$1.05 billion senior secured term loan B due 2018. 
     -- We are also affirming our ratings on BRP, including our 'B+' long-term 
corporate credit rating on the company. 
     -- The stable outlook reflects Standard & Poor's opinion that BRP will 
sustain improvement in its operating performance and that credit ratios will 
be in line with our expectations in the next year.

Rating Action
As Standard & Poor's Ratings Services previously published on Nov. 1, 2012, we 
affirmed our ratings on Valcourt, Que.-based recreational products 
manufacturer Bombardier Recreational Products Inc. (BRP), including our 'B+' 
long-term corporate credit rating on the company. The outlook is stable.

In addition, we assigned our 'B+' issue-level rating and '4' recovery rating 
to BRP's proposed US$1.05 billion senior secured term loan B due 2018. The '4' 
recovery rating indicates our expectation of average (30%-50%) recovery in the 
event of default. We understand that proceeds of the new term loan will be 
used to refinance existing term debt, pay a special C$375 million dividend, 
and for general corporate purposes. 


Rationale
The ratings on BRP reflect Standard & Poor's view of the company's "weak" 
business risk profile and "aggressive" financial risk profile (as our criteria 
define the terms). We base our business risk assessment on the volatile demand 
for the company's products due to their discretionary nature, which led to 
sharp declines in revenue and profit in the last recession, and intense 
competition. These factors are partially offset by what we consider BRP's 
solid market position in the recreational products industry, improved 
operating performance, and well-established dealer network. Our financial risk 
assessment is based on the company's aggressive financial policy and weak 
credit protection measures.

BRP manufactures motorized recreational products including snowmobiles under 
the Ski-Doo and Lynx brand names, watercraft under the Sea-Doo name, power 
sport engines under the Rotax name, all-terrain vehicles (ATV), side-by-side 
vehicles and roadsters under the Can-Am name, and outboard engines under the 
Evinrude name. The company's revenues are geographically diversified, with key 
markets in the U.S., Canada, and Europe.

Consumer spending for "big ticket" discretionary items, such as BRP's 
snowmobiles, personal watercraft, and ATVs, declined considerably in 2008 and 
2009, but began improving in 2010. Growth has continued since then, with 
reported revenue and gross profit up a significant 21% and 36%, respectively, 
in the six months ended July 31, 2012, compared with the same period in 2011, 
largely because of increased volume, favorable product mix, and lower sales 
incentive costs, partially offset by higher commodity costs. Management's 
aggressive cost cutting in the past few years to better streamline the 
operations is reflected in BRP's improved profitability. 

In our base case scenario for fiscal 2013, Standard & Poor's expects:
     -- BRP's good operating performance to continue this year, albeit with 
growth in revenue and gross profit likely to be at a slower pace than in 
fiscal 2012, including low-teen double-digit percent revenue growth;
     -- Cost of goods sold will decline as a percent of revenue, leading to 
improvement in the gross margin; and
     -- The company will continue to generate positive free cash flow.
Credit protection measures (adjusted for operating leases, pension liability, 
and accounts receivable securitization) continued to improve because of higher 
EBITDA, with adjusted debt to EBITDA of 2.5x for the 12 months ended July 31, 
2012, which is down from 3.8x for the same period last year. Pro forma for the 
proposed sizable dividend payment and resulting additional debt, we expect 
adjusted debt to EBITDA to rise to about 3.8x, which remains in line with our 
guidance for the corporate credit rating and outlook. 

Liquidity
We believe BRP will have adequate liquidity in the next 12 months, with 
sources exceeding uses by more than 1.2x. We expect that net sources would be 
positive, even with a 15% drop in EBITDA. Our view is based on the following 
information and assumptions:
     -- The company's sources of liquidity are: cash, availability under the 
C$350 million asset-backed lending facility due March 2016, and free cash 
flow. We believe BRP will generate sufficient cash flow in fiscal 2013 to 
support capital expenditures. 
     -- The proposed term loan is expected to amortize by 1% annually. The 
proposed credit agreement includes an excess cash flow sweep that begins in 
2014, which could result in expected higher-than-scheduled amortization of the 
term loan.
     -- We believe that the company will maintain at least a 15% EBITDA 
cushion on its minimum fixed charge coverage ratio of 1.1x. The covenant only 
applies when excess availability (as defined in the credit agreement) on the 
revolver is less than C$100 million for seven consecutive days.
     -- We expect BRP to have sound relationships with its banks and a 
generally satisfactory standing in credit markets.

Standard & Poor's understands that the company's liquidity position can 
fluctuate significantly from quarter to quarter because of the seasonal nature 
of revenues and cash flows. 

Recovery analysis
Standard & Poor's rates BRP's senior secured revolving credit facility 'BB' 
(two notches above the corporate credit rating on the company), with a '1' 
recovery rating, indicating our expectation of very high (90%-100%) recovery 
in a default scenario. 

We also rate the company's senior secured term debt 'B+' (the same as the 
corporate credit rating on BRP), with a recovery rating of '4', indicating our 
expectation of average (30%-50%) recovery in the event of a default. 

Outlook
The stable outlook reflects Standard & Poor's opinion that BRP will sustain 
improvement in its operating performance and that credit ratios will be in 
line with our expectations in the medium term, including adjusted debt to 
EBITDA in the 3x-4x range. We could lower the ratings if the company's 
financial flexibility weakens because of poor operating performance or 
additional sizable dividends, resulting in adjusted debt to EBITDA above 5x. 
Although we recognize the company's good credit metrics for the ratings and 
higher margin point to potentially improving creditworthiness, the ratings on 
BRP remain constrained at current levels owing to its ownership structure and 
future financial policy considerations. 

Related Criteria And Research
     -- Methodology and Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings On Global Industrials 
Issuers' Speculative-Grade Debt, Aug. 10, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Bombardier Recreational Products Inc.

Ratings Affirmed/Recovery Ratings Unchanged                          
Corporate credit rating       B+/Stable/--  
Senior secured revolver       BB            
 Recovery rating              1             
Senior secured term debt      B+           
 Recovery rating              4             

Ratings Assigned
US$1.05 bil. sr secured term debt due 2018  B+
 Recovery rating                            4 


Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.