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Clark Equipment Company -- Moody's affirms Doosan Bobcat's Ba3 rating; outlook stable

·16 min read

Rating Action: Moody's affirms Doosan Bobcat's Ba3 rating; outlook stableGlobal Credit Research - 15 Mar 2021Hong Kong, March 15, 2021 -- Moody's Investors Service has affirmed the Ba3 corporate family rating (CFR) of Doosan Bobcat Inc. (DBI).At the same time, Moody's has affirmed the Ba3 ratings on the backed senior secured term loan and backed senior secured notes that are borrowed by Clark Equipment Company (CEC) and guaranteed by DBI.The outlook remains stable.The rating actions follow DBI's announcement on 11 March 2021 that it will acquire the industrial vehicle (forklift) business of Doosan Corporation for KRW750 billion (around USD660 million). DBI expects to complete this transaction by 5 July 2021."Although the proposed acquisition will significantly increase DBI's net debt from the current very low levels, in our view, DBI's strong financial buffers and good ability to generate free cash can absorb the impact of the transaction without materially compromising its financial profile," says Wan Hee Yoo, a Moody's Vice President and Senior Credit Officer."In addition, the acquisition will improve DBI's business and geographical diversity," adds Yoo.RATINGS RATIONALEMoody's expects DBI to fund the acquisition with a mix of debt and cash holdings. As of the end of 2020, DBI had liquidity holdings of USD733 million. Furthermore, DBI's adjusted EBITDA should increase by around 20% in 2021 from a year ago, owing to a recovery in its key markets as well as incremental earnings from the acquired business.However, given debt expansion is likely to outpace EBITDA growth, Moody's expects DBI's adjusted debt/EBITDA to weaken to around 3.2x in 2021 from around 2.9x estimated for 2020. The change in terms of adjusted net debt/EBITDA will be more pronounced, with the ratio increasing to about 2.1x from 1.2x during the same period.Nonetheless, this level of financial leverage is consistent with its Ba3 rating category. Moody's also expects its financial leverage to improve gradually from 2022, underpinned by its good ability to generate free cash flow and a gradual increase in earnings.Moody's expects DBI's acquisition of the forklift business to provide synergies by using DBI's sales networks. The forklift business has maintained stable performance over the past few years, supported by its strong position in Korea. In 2019, this business reported revenue of about KRW913 billion and operating profit of KRW62 billion.Given this entity will be spun off from Doosan Corporation, it will be temporarily joint and severally liable for the liabilities that existed at Doosan Corporation at the time of the spin-off. However, Moody's believes that this will not be a material risk for DBI, given that (1) the majority of the joint and several liabilities will fall off over the next couple of years as outstanding debt matures; and (2) this transaction will significantly improve Doosan Corporation's liquidity and debt-servicing ability.Moody's also does not expect DBI to pursue similar large-scale transactions with Doosan group affiliates at least over the next 1-2 years, given the former's reduced financial buffers and the fact that the group's business restructuring has largely completed.DBI's Ba3 CFR continues to be supported by its dominant position in the compact farm and construction equipment market in North America, good ability to generate positive free cash flow and good liquidity profile.These strengths are counterbalanced by the cyclical nature of the compact farm and construction equipment industry, its moderate market position in Europe and the risk related to its group affiliates.DBI's rating also takes into account the following environmental, social and governance (ESG) factors.The company has generally maintained a prudent financial policy over the past few years. For instance, DBI has a track record of making ongoing voluntary prepayments on its term loan until 2019. Although debt is likely to increase in 2021 to fund the large acquisition, we expect the company's overall financial profile to remain sound.Moody's considers Doosan group's control over DBI as a governance risk, given the liquidity risks facing key Doosan group affiliates. This factor is partly offset by DBI's reasonably conservative dividend payments and the arms-length nature of its key transactions with group affiliates.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook mainly reflects Moody's expectation that DBI's business profile will remain broadly stable, while the extent of weakening in its financial leverage as a result of the acquisition will be manageable.Moody's could upgrade the ratings if (1) DBI's financial profile remains strong, such that its adjusted debt/EBITDA remains below 2.0x-2.5x on a sustained basis; and (2) Doosan group's overall credit quality improves meaningfully.Moody's could downgrade the ratings if DBI's earnings remain weak or debt increases further, such that its adjusted debt/EBITDA exceeds 3.5x-4.0x on a sustained basis. The ratings could also be strained if Doosan group's credit quality deteriorates meaningfully. In addition, material cash outlays to Doosan group affiliates would also be negative for the rating.The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/research/Manufacturing-Methodology--PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Doosan Bobcat Inc. is the leading manufacturer of compact farm and construction equipment mainly in North America and EMEA. It engages in the design, manufacture, sale and service of compact farm and construction equipment under the Bobcat brand, and of portable power products.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.Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.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.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.The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. 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