OREANDA-NEWS. Fitch Ratings has upgraded Stabilus S.A.'s Issuer Default Rating (IDR) to 'B+' from 'B'. The Outlook is Stable. The remaining EUR256.1m senior secured notes issued by Servus Luxembourg Holding S.C.A. have been upgraded to 'BB'/'RR2' from 'BB-'/'RR2'.

The rating action reflects the reduction in funds from operations (FFO) adjusted leverage below the previously stated upgrade guidance of 4x as well as our expectations for further growth in revenues and EBITDA and continuous solid free cash flow in the foreseeable future. Fitch also expects Stabilus to exceed the previously stated upgrade guidance levels for FFO interest cover (3.5x) and fixed charge cover (3x) in 2015 and beyond.

Stabilus has secured funding through bank loans to be drawn in June 2015 (senior secured term loan of EUR270m and a revolving credit facility) of EUR50m that will lead to significantly lower interest expenses.

The Stable Outlook reflects the limited upgrade potential as the ratings are constrained by Stabilus' limited scale and diversification.

KEY RATING DRIVERS

Improving Business Profile:
Stabilus' business model shows a favourable mix between cash generative mature products benefitting from scale effects and market leadership as well as growth products such as the Powerise (electromechanical openers) division that drives the revenue expansion. A continuous increase of Powerise's share strengthens the overall product portfolio. The company's commercial profile is further enhanced by an increasingly diversified end market exposure and contained customer concentration risk. The sizeable Industrials (including swivel chairs 32.8% of revenues for FY2014) segment shows strong customer diversification.

Competitive threats remain:
Stabilus has successfully grown the Powerise segment, the key contributor to its revenue and earnings expansion. However, Stabilus competes against much larger and diversified suppliers and the segment requires high R&D and capex.

Solid Cash Generation
We forecast stable operating and free cash flows. The envisaged refinancing of the senior notes is expected to significantly relieve the debt service burden. Our base rating case also includes regular dividend payments of 40% of projected net income provided Stabilus' underlying cash generation continues to grow on its current trend and there is no substantial re-leveraging.

Exposure to Volatile Markets
Stabilus predominantly operates in mature markets marked by high demand volatility and cyclicality. This is particularly relevant given Stabilus' high operating leverage. A sustained decline in demand could materially weaken its profitability and cash flow generation.

Further Growth and Solid Profitability
Stabilus has grown significantly in the past three years, growing sales at a CAGR of 7.2% between FY2011 to FY2014, while adding more than EUR25m in EBITDA during this period, with the absolute level reaching EUR89.9m after adjusting for one-off costs which relate to the IPO. Key contributor to this growth in sales and profitability was the Powerise segment which grew around 55% (EUR30.3m) for FY2014 (growth FY2013: 81%, EUR25.2m). Further growth in this segment is anticipated.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- further increase in revenues, mainly driven by Powerise
- largely stable operating margin
- significantly lower interest expenses
- capex at 7%-8% of sales
- dividend payments of 40% net income

RATING SENSITIVITIES:

Positive: Future developments that could lead to positive rating actions include:

Further upgrades are unlikely given Stabilus' scale. Before an upgrade can be considered a significant improvement in scale and diversification would be a pre-requisite.

Negative: Future developments that could lead to negative rating action include:

A negative rating action could be considered if FFO net adjusted leverage exceeds 3.5x on a sustainable basis and free cash flow margin deteriorates to below 2%.