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Rating Action: Moody's downgrades CIRCOR's ratings with Sr Secured to B2 and the Corporate Family Rating to B3, outlook stable
Global Credit Research - 11 Dec 2020
New York, December 11, 2020 -- Moody's Investors Service (Moody's) downgraded the ratings of CIRCOR International, Inc. (CIRCOR) including the Corporate Family Rating to B3 from B2, the Probability of Default Rating to B3-PD from B2-PD and the senior secured rating to B2 from B1. The Speculative Grade Liquidity Rating was maintained at SGL-3. The rating outlook is stable.
The downgrades reflect expectations that Moody's adjusted leverage, currently near 8x, will remain elevated through 2021 with modest free cash flow, indicative of protracted and uneven recoveries in CIRCOR's key end markets. Lack of a material recovery in results as seen by third quarter 2020 EBITDA flat with early 2020 levels highlights CIRCOR's delayed upward trajectory. This reflects CIRCOR's exposure to heavy industrial markets that tend to recover later than light industrial markets. To illustrate, many industrial companies experienced a bounce back in earnings and free cash flow, from unwinding working capital, coming off the first half 2020 trough demand impact.
CIRCOR's ratings reflect favorable niche market focus within severe flow control applications, a diverse customer base highlighted by blue-chip industry leaders, an increasingly variable cost structure and an asset-light business model. Scale and scope remain modest within the large, highly fragmented global flow control sector but over the longer term, revenues should resume solid organic growth as the commercial aerospace industry gradually recovers along with numerous sectors within the industrial markets (commercial marine, chemical processing, power generation). Resiliency from defense revenues, at 15% of total revenues and growing, as well as benefits from an aftermarket revenue stream (roughly 30% of revenues) should lead to stronger earnings over the next couple of years.
As shown in 2020, operations are exposed to key end markets that can be cyclical, particularly within the industrial segment which continues to be challenged. Debt-to-EBITDA, applying Moody's standard adjustments that include a $150 million underfunded pension liability, is anticipated to remain high but fall below 7x by year-end 2021 as earnings steadily increase. Accelerated de-levering from non-core asset sales is unlikely as the company pruned its portfolio during 2019 and the early part of 2020, using proceeds to reduce debt. However, Moody's expects the majority of modest free cash flow to be used for debt repayment over the next 18 months.
The rating outlook is stable with Moody's expectations for the return of modest organic revenue growth and steadily increasing earnings during 2021, resulting from a measured rebound in key end markets. Free cash flow is expected to improve meaningfully even with a moderate recovery in demand as several large cash outflows in 2020 won't occur in 2021. Liquidity is anticipated to remain sufficient to manage through the potential for extended macroeconomic uncertainty.
CIRCOR is expected to maintain an adequate liquidity profile, supported by a cash balance in the $70 million range and free cash flow that trends back towards the five-year average of at least $20 million/year over the next two years. Liquidity is also supported by a $150 million revolving credit facility set to expire in 2022. Borrowing availability under the facility is anticipated to be $85 million by the end of 2020 after deducting funds drawn and posted letters of credit. The facility is subject to a springing total net first-lien leverage ratio tested if the aggregate amount of outstanding borrowings exceeds a set percentage of the facility. The term loan does not contain any financial maintenance covenants. There are no near-term debt maturities or annual amortization requirements following the company's term loan prepayments during 2019.
CIRCOR is a supplier into end markets (aerospace & defense, downstream oil & gas) that are associated with greenhouse gases and carbon dioxide emissions. When customers within these sectors are subject to laws and regulations, CIRCOR is exposed to risks that the additional costs by customers to comply with such laws and regulations could negatively impact demand for its products. Even without such laws and regulations, increased awareness and adverse publicity in the global marketplace about the levels of greenhouse gas emissions by companies in the manufacturing and energy industry could reduce customer demand.
Moody's took the following rating actions on CIRCOR International, Inc.:
- Corporate Family Rating, downgraded to B3 from B2
- Probability of Default Rating, downgraded to B3-PD from B2-PD
- Senior Secured Bank Credit Facility Rating, downgraded to B2 (LGD3) from B1 (LGD3)
- Speculative Grade Liquidity Rating, maintained at SGL-3
- Rating outlook, Stable
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded with evidence of a robust uptick in performance from stronger demand in the oil & gas and aerospace & defense sectors, resulting in a sharp improvement in margins and cash flow. Debt-to-EBITDA below 5.75x, an EBITDA margin approaching the low-to-mid-teens and free cash flow-to-debt trending towards 5% could also result in upward rating pressure. Accelerated growth in higher-return aftermarket revenues would also be viewed favorably. The ratings could be downgraded due to the inability to demonstrate sequential quarterly improvement in earnings or full year free cash flow of at least $15 million during 2021. Leverage remaining above 6.5x, especially in the absence of solidly positive free cash flow, could lead to downward pressure on the ratings. Deteriorating liquidity could also contribute to a negative rating action.
CIRCOR International, Inc. provides flow and motion control precision-engineered pumps, valves, fittings, switches, sensors and flight components for use in extreme operating environments (e.g. high pressure, high temperature, caustic fluids, fluids with abrasives) within the industrial and aerospace & defense markets. Revenues for the latest twelve months ended September 30, 2020 were approximately $810 million.
The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For 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_1133569.
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.
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.
Eric Greaser Vice President - Senior Analyst 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 Robert Jankowitz MD - Corporate Finance 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
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