S&P: Phoenix Services International LLC Financial Risk Profile Revised To Highly Leveraged From Aggressive; Ratings Affirmed
At the same time, we affirmed our 'B+' issue-level rating on the company's senior secured debt. Our recovery rating on the term loan remains '2', indicating our expectation for substantial (70% to 90%; at the lower end of the range) recovery in the event of a payment default.
"Our revision of Phoenix Services' financial risk profile is based on our assumption that debt to EBITDA will be about 5x in 2016," said S&P Global Ratings credit analyst William Ferara.
Debt to EBITDA for the trailing 12 months ended June 30, 2016 and at year-end 2015 were at or slightly above 5x. We view Phoenix Services' financial risk profile as highly leveraged consistent with our methodology for companies owned by financial sponsors and based on our view that debt leverage is expected to be at or above 5x. For 2016, we also forecast funds from operations (FFO) to debt of about 10%-12% and EBITDA interest coverage of around 2x-2.25x. Recent quarterly performance has improved slightly because of favorable domestic demand trends and lower import levels. Trade case filings and determinations against China and other steel exporting countries have caused hot-rolled coil spot prices to increase to about $550 per ton currently from the $400 per ton in early 2016. Although the recent rally in steel prices has faded somewhat, we still expect steel prices to remain at levels that will help sustain credit metrics in 2016, but to remain volatile over the long term depending on continued global overcapacity and end-market demand (especially construction and auto).
We also revised our assessment of Phoenix Services' comparable rating modifier to neutral from negative. The company's size and scope, which is smaller than that of industry leaders, and its sole dependence on the steel sector are comparable to peer companies for the 'b' anchor rating. Also, the company's credit ratios are within the range deemed adequate for the highly leveraged financial risk profile.
The stable outlook reflects our expectation that despite somewhat volatile industry conditions Phoenix Services' business model will support cash flow generation adequate for the rating over the next 12 months. We expect the company to generate adjusted debt to EBITDA of about 5x in 2016. We also expect the company to prudently manage growth and shareholder-friendly initiatives.
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