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