Aegion Corporation -- Moody's assigns B2 CFR and sr sec ratings to Aegion; outlook stable

Rating Action: Moody's assigns B2 CFR and sr sec ratings to Aegion; outlook stableGlobal Credit Research - 19 Mar 2021$725 million of debt ratedNew York, March 19, 2021 -- Moody's Investors Service, ("Moody's") assigned Aegion Corporation ("Aegion") a corporate family rating ("CFR") at B2 and a probability of default rating ("PDR") at B2-PD and rated its proposed senior secured credit facilities at B2. The outlook is stable.On March 15, Aegion announced it had accepted a revised offer from affiliates of private equity sponsor New Mountain Capital LLC ("New Mountain") to be acquired for $995 million in cash. The purchase price and related transaction fees and expenses will be financed with the proposed senior secured credit facilities and about $450 million of equity.RATINGS RATIONALE"The large and aging wastewater and energy pipeline infrastructure in North America and the potentially catastrophic environmental consequences of a failure drives steady demand for Aegion's integrated pipeline rehabilitation services, although initially high financial leverage and anticipated aggressive private equity financial strategies pressure credit quality," said Edmond DeForest, Moody's Vice President and Senior Credit Officer.The B2 CFR reflects Aegion's high debt to EBITDA expected to decline to around 5.5 times by the end of 2021, balanced by its leading market positions in trenchless wastewater pipe rehabilitation, which accounted for about 70% of 2020 revenue and more than 80% of profits, and corrosion prevention solutions. Moody's expects steady demand and expanded profit rates in the wastewater segment will drive mid single digit revenue growth and mid teens percent EBITDA margins. While revenue and profit rates in corrosion protection were adversely impacted by the COVID-19 pandemic, especially in the Middle East, as decreased economic and travel activity led to reduced global energy demand, we anticipate these business lines should rebound in the next 12 to 18 months as the global economy continues to recover, helping fuel revenue growth rate and profitability rate expansion. A contract backlog of over $400 million as of December 31, 2020 and about 200 basis points of annual profitability rate improvements from lower operating costs, including from the elimination of public company costs, provide additional support. No customer accounted for more than 2% of revenue in 2020; Moody's anticipates the top 25 customers will account for less than 10% of revenue in 2021.Unless otherwise noted, all financial metrics cited reflect Moody's standard adjustments and exclude discontinued operations.Aegion pioneered cured in place pipe ("CIPP") technology via its Insituform® brand beginning over 50 years ago and offers an integrated manufacturing and installation solution. Aegion estimates that the North American trenchless pipeline rehabilitation market was about $1.5 billion in 2020, and that it had an approximately 30% market share of new project wins. Demand for service in the trenchless water and wastewater pipe rehabilitation market is supported by an aging and largely local pipeline infrastructure, existing and emerging federal, state and local regulatory pressure, the relatively low cost of CIPP solutions compared to pipeline replacement and the availability of funds from user-fee -supported municipal wastewater authority borrowing. Moody's considers the CIPP market mature and competitive, with most projects awarded to the lowest bidder to a request for proposal. Although patents no longer cover Aegion's CIPP technology, the company's vertically integrated manufacturing and service model, long history of successfully completing projects and proprietary process knowledge provide meaningful competitive advantages and barriers to entry to new market entrants. CIPP rehabilitation techniques are more common than other trenchless rehabilitation alternatives, but risk of a new technology emerging remains a credit concern.The Insituform® CIPP process can help wastewater authorities and utilities minimize the environmental impact and social disruption that can result from conventional dig-and-replace pipeline upgrade methods. Aegion has never been found to have caused a groundwater or other contamination as a result of its services that it could not remediate, according to the company. Therefore, Moody's considers Aegion to exhibit positive credit impacts from environmental and social considerations, including with respect to water and waste management and health and safety concerns. Moody's expects governance risk to be high, reflecting aggressive financial strategies with respect to debt-funded acquisitions and shareholder returns typical of private equity controlled companies.Moody's considers Aegion's liquidity profile good. Moody's expects at least $25 million of cash at all times in the next 12 to 15 months and free cash flow of at least $30 million in 2021, excluding transaction and financing costs associated with the New Mountain acquisition, after about $25 million of capital expenditures (before Moody's standard adjustments). There is $1.625 million of quarterly senior secured 1st lien term loan amortization, or $6.5 million per year. Additionally, annual term loan principal repayments are required equal to 50% of Excess Cash Flow (as defined in the loan agreement) while the 1st Lien Net Leverage Ratio (as defined in the loan agreement) is above 5.0 times, with steps down to 25% and 0% below 5.0 times and below 4.5 times, respectively. Aegion's Energy Services business line has been classified as a discontinued operation since the company plans to sell the business. Subject to certain exceptions and reinvestment rights, 100% of the sale proceeds must be used to repay term loans so long as the 1st Lien Net Leverage Ratio is above 5.0 times, with 50% and 0% required below 5.0 times and 4.5 times, respectively. The $75 million senior secured revolving credit facility maturing in 2026 is expected to be unused and fully available. Access to the revolver is subject to maintenance of the 1st Lien Net Leverage Ratio below 8.4 times when more than 35% of the revolver is used. Moody's does not anticipate that the financial covenant will be applicable, but expects that Aegion would remain in compliance with the test if it were to be measured. There are no financial covenants applicable to the term loan.The B2 senior secured 1st lien credit facility rating reflects the B2-PD PDR and a loss given default ("LGD") assessment of LGD4. The facility is secured by a perfected first lien security interest in substantially all of the Aegion's assets, subject to certain permitted liens and other exceptions outlined in the facility agreement. The facility ranks senior to all other claims in Moody's hierarchy of claims at default other than a small amount of priority accounts payable assumed to be equal to 20 days of costs of goods sold.The stable outlook reflects Moody's expectations for 5% to 8% revenue growth, profitability rate expansion, debt to EBITDA approaching 5.5 times and 5% free cash flow to debt.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if debt to EBITDA is expected to be maintained below 5.0 times and EBITA to interest will remain at least 2.5 times while Aegion articulates and maintains balanced financial strategies, including by emphasizing debt repayment over debt-funded acquisitions or shareholder returns.The ratings could be downgraded if revenue growth is less than anticipated, profitability rates do not improve, debt to EBITDA is expected to remain above 6.0 times or liquidity deteriorates...Issuer: Aegion Corporation.... Corporate Family Rating, Assigned B2.... Probability of Default Rating, Assigned B2-PD....Senior Secured 1st Lien Revolving Credit Facility, Assigned B2 (LGD4)....Senior Secured 1st Lien Term Loan, Assigned B2 (LGD4)....Outlook, is stableThe principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Aegion, based in Chesterfield, MO, provides integrated pipeline rehabilitation products and services mostly to US municipal waste water authorities and corrosion protection services to oil and natural gas pipeline infrastructure owners in North America and the Middle East. Moody's expects 2021 revenue from continuing operations of over $800 million.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.At least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Edmond DeForest VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Karen Nickerson Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​