S&P: H. B. Fuller Co. 'BBB' Corporate Credit Rating Affirmed; Outlook Revised To Stable
At the same time we affirmed our 'BBB' issue-level ratings on the company's senior unsecured credit facilities, including the $300 million revolving credit facility due 2019 and the $300 million term loan due 2019.
"The outlook revision reflects our expectation that Fuller will generate growth in its high margin engineering adhesives segment, while continuing to benefit from cost-savings and operating efficiency initiatives, resulting in gradual EBITDA growth in the next 12-24 months," said S&P Global credit analyst Brian Garcia. "As a result, we expect credit measures to gradually improve over the same period," he added.
We also expect management to remain supportive of maintaining credit metrics appropriate for the current rating, and fund growth and shareholder rewards in a prudent manner. At the current rating, we expect weighted average FFO to debt at above 30% (pro forma for acquisitions).
The stable outlook reflects our belief that the company's EBITDA margins will gradually strengthen in the next 12 to 24 months, driven by growth in the high margin engineering adhesives segment. As a result, credit measures should gradually improve over the same period. FFO to debt for the trailing-12-month period ended May 2016 was about 30%, and we expect it to gradually improve. We assume that management will remain committed to maintaining the financial profile, and expect that it will be prudent in funding growth and shareholder rewards. At the current rating, we expect weighted average FFO to debt above 30% pro forma for acquisitions.
We could lower the ratings within in the next 24 months if, as a result of a combination of weaker than expected demand and higher raw material costs, margins compressed, resulting in weaker than expected leverage. This could occur if EBITDA margins were 200 bps lower than our 2017 projections along with minimal revenue growth. To consider a downgrade we would expect weighted average FFO to debt below 30% pro forma for acquisitions. We could also lower the ratings if, contrary to our expectations, management significantly increased debt further to fund an acquisition or shareholder rewards.
We could raise the ratings within the next 24 months if greater than expected revenue growth, combined with stronger than expected EBITDA margins, led to credit metrics improving significantly more than we currently project in our base case scenario. To raise the ratings we would expect weighted average FFO to debt above 45% pro forma for acquisitions. We would also have to believe that management was committed to maintaining credit measures at these levels.
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