OREANDA-NEWS. Fitch Ratings has upgraded its rating on Harsco Corporation's (Harsco) amended revolving credit facility (RCF), which is now secured, to 'BBB-/RR1' from 'BB+/RR4.' Fitch has also assigned a 'BBB-/RR1' to the company's new secured term loan A. Fitch maintains Harsco's long-term Issuer Default Rating (IDR) at 'BB+' and its senior unsecured notes at 'BB+/RR4', and the ratings are on Rating Watch Negative. A full list of current ratings follows at the end of this release.

KEY RATING DRIVERS
Harsco has amended its $500 million unsecured credit facility, resulting in a $600 million secured facility composed of a $350 million revolver and a $250 million term loan A. The maturity date has been extended to June 2019.

The upgrade of the revolving credit facility and the rating of the new term loan reflect the expected strong recovery due to the collateral backing the facilities. This collateral includes the capital stock of each direct subsidiary (65% of stock of foreign subs) and substantially all of the company's tangible and intangible assets. In addition, all of the company's domestic, wholly-owned restricted subsidiaries guarantee the facilities. The proceeds from the term loan will be used to repay borrowings on the revolver, and there is no incremental debt.

Fitch placed Harsco's ratings on Rating Watch Negative following the November 2015 announcement that the company is exploring the separation of the Metals and Mining businesses.
The Negative Watch reflects Fitch's belief the potential separation will reduce the diversification and scale of Harsco's revenues and profitability, given the company's already small size and that the Metals and Mining (M&M) segment represents roughly two-thirds of revenues and one-third profitability on a trailing 12 month (TTM) basis. Annual revenues will be $625 million to $675 million versus roughly $1.8 billion on a pre-separation basis, while operating profit margins will be in the low double digits, versus high single digits presently.

The Negative Watch also incorporates uncertainty around the ultimate capital structure and financial policies of the remaining Harsco (Remainco), which will be comprised of the faster growing and more profitable Rail and Industrials segments, as well as a minority interest in the Brand joint venture (JV). Fitch believes net proceeds from the separation may be constrained by weak demand facing M&M's businesses and limited number of potential buyers, reducing potential debt reduction at Remainco. Fitch expects to resolve the Negative Watch upon the company's conclusion of the review with a likely outcome of at least a one-notch downgrade.

Harsco's operating results for the quarter ended Sept. 30, 2015 were roughly in-line with Fitch's expectations, which included ongoing weakness in steel production, energy markets affecting the Industrials businesses and the timing of equipment sales in Rail. Fitch expects Harsco's top line to remain pressured and decline by low double digits in 2015. Nonetheless, ongoing cost reduction actions, particularly in M&M, should mitigate a portion of the impact on profitability, which Fitch estimates will decline in the mid-teens for the year.

Given the weak demand environment, Fitch expects credit protection measures will remain weak over at least the near term, with total debt to operating EBITDA of 3.3 times (x) for the latest 12 months (LTM) ended Sept. 30, 2015, versus 2.9x exiting 2014. Interest Coverage (EBITDA to gross interest expense) should also remain pressured, at 5.6x for the LTM ended Sept. 30, 2015, versus 6.5x for 2014.

Harsco also reduced the per share dividend from $0.20 to $0.05 to maximize financial flexibility within the context of the weak demand environment. Fitch expects this, in conjunction with lower capital spending, should enable Harsco to achieve break-even to positive FCF through the intermediate term.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:

--Metals segment returns to positive revenue growth in 2017 and reduces negative revenue growth to mid-single digits in 2016;
--Longer-term revenue growth for Rail and Infrastructure are +3%;
--Harsco achieves targeted cost savings of $35 million to $40 million in 2016, resulting in profit margin expansion despite negative revenue growth through 2016;
--Capital spending is 9% of revenues in 2016-2017, while customer advances are flat at lower levels.

RATING SENSITIVITIES
Negative rating actions could occur if Fitch expects:
--The company completes the separation of the M&M businesses, given reduced scale and diversification; or
--The company decides to not separate the M&M businesses and Fitch expects total leverage will remain above 3x or negative FCF through the intermediate term.

Although an unlikely outcome, the Negative Watch could be resolved and ratings affirmed at current levels if Harsco:
--Retains the M&M businesses; and
--Commits to returning total leverage to 3x in the near term.

LIQUIDITY
Pro forma for the senior notes repayment and the amendment to the credit facility, total liquidity at Sept. 30, 2015 was sufficient and consisted of:
--$58 million in cash and cash equivalents (the vast majority of which was located outside the U.S.);
--Around $250 million available under the $350 million senior secured revolver expiring in 2019.

Fitch expects break-even to positive FCF through the intermediate term should improve liquidity, given negative FCF in recent years.

FULL LIST OF RATING ACTIONS

Fitch maintains the following ratings on Harsco Corporation:

--Long-term IDR of 'BB+';
--Senior unsecured debt of 'BB+/RR4';

Fitch has assigned the following rating:
--Senior secured term loan rated 'BBB-/RR1'.

Fitch has taken the following rating actions on Harsco Corporation:

--Senior secured RCF upgraded to 'BBB-/RR1'from 'BB+/RR4'.

The Ratings are on Rating Watch Negative.