EWT Holdings III Corp. -- Moody's upgrades ratings of EWT Holdings (Evoqua) (CFR to B1); outlook stable
Rating Action: Moody's upgrades ratings of EWT Holdings (Evoqua) (CFR to B1); outlook stable
Global Credit Research - 16 Dec 2020
Approximately $950 million of rated debt affected
New York, December 16, 2020 -- Moody's Investors Service, ("Moody's") upgraded EWT Holdings III Corp., the parent company of Evoqua Water Technologies LLC (Evoqua)'s corporate family rating (CFR) to B1 from B2 and its probability of default rating to B1-PD from B2-PD. Moody's also upgraded the company's first lien senior secured debt ratings to B1 from B2. Concurrently, Moody's assigned an SGL-2 liquidity (Speculative Grade Liquidity) rating, denoting our expectation that the company will maintain a good liquidity profile over the next twelve to eighteen months. The ratings outlook is stable.
The ratings upgrade is supported by the company's progress in reducing balance sheet debt, and Moody's expectation that the company will continue to generate positive annual free cash flow. "The rating upgrades amid the coronavirus pandemic reflect the expectation that the company will maintain its improved leverage and positive free cash flow " said Gigi Adamo, Moody's Vice President and lead analyst for the company. "The ability to improve margins and increased working capital efficiency are also reflected in the upgrades," added Adamo.
RATINGS RATIONALE
Evoqua's B1 CFR broadly reflects the benefits derived from a well-entrenched position within the water treatment industry driven by favorable industry dynamics and a substantial services revenue stream that is slightly offset by exposure to cyclical capital equipment sales. Evoqua's core business is centered on the provision of clean water solutions to customers through advanced water and wastewater treatment systems and technologies. Positive long-term tailwinds in the global water treatment market are also supportive of the company's credit profile.
At the same time, the ratings reflect Evoqua's high funded debt levels (approximately $886 million at September 30, 2020) relative to the company's $1.4 billion revenue size with free cash flow to debt expected to remain in the low to mid-single digits percentage range, constrained by capital investment needed to support the company's top line growth and execute on its backlog.
Evoqua's corporate governance profile is supported by a relatively balanced capital allocation approach. The company's maintenance of a comparatively lower financial leverage profile somewhat mitigates the seasonal nature of the company's business and the uneven demand that results from a portion of the company's revenues derived from contractual work and different end markets with varying demand profiles and macroeconomic sensitivities. The ratings do not anticipate a shift towards a more aggressive financial policy such as debt-funded shareholder remuneration. Moody's believes that event risk has diminished as Evoqua's largest investor, AEA Investors LP, gradually reduced its ownership stake to under 10% as of December 2020 from roughly one-third of shares outstanding when the company completed its IPO in November 2017.
Evoqua's SGL-2 liquidity rating incorporates Moody's expectation that the company will continue to generate free cash flow in excess of $15 million in fiscal 2021 after accounting for elevated capital expenditures to realize backlog conversion while maintaining both good revolver availability and covenant headroom.
The stable ratings outlook reflects Moody's expectation that Evoqua will be able to sustain margin and working capital improvements, thus supporting continued free cash flow to debt (before growth-related capex) in the mid-single digit range while maintaining a good liquidity profile.
The following rating actions were taken:
Upgrades:
..Issuer: EWT Holdings III Corp.
....Corporate Family Rating, Upgraded to B1 from B2
....Probability of Default Rating, Upgraded to B1-PD from B2-PD
....Senior Secured 1st Lien Revolving Credit Facility, Upgraded to B1 (LGD3) from B2 (LGD3)
....Senior Secured 1st Lien Term Loan, Upgraded to B1 (LGD3) from B2 (LGD3)
Assignments:
..Issuer: EWT Holdings III Corp.
.... Speculative Grade Liquidity Rating, Assigned SGL-2
Outlook Actions:
..Issuer: EWT Holdings III Corp.
....Outlook, Remains Stable
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A downward ratings action could be warranted if the company enters into debt-financed acquisitions such that debt/EBITDA exceeds and is sustained above 5.0x, revenue meaningfully declines accompanied by margin erosion or the free cash flow turns negative. The inability to realize anticipated cost savings and operating efficiencies or a deterioration in the company's liquidity profile, including a meaningfully lower cash balance and/or significantly reduced availability under the revolver would also exert downward ratings pressure.
Conversely, ratings could be upgraded following meaningful revenue growth and margin improvement accompanied by free cash flow to debt improving to and sustained above 7% as well as debt/EBITDA improving to and sustained below 3.0x, while EBITDA margins continue to exceed 15%. The maintenance of a good liquidity profile would also support higher ratings.
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.
Headquartered in Pittsburgh, Pennsylvania, EWT Holdings III Corp. is a publicly-traded (NYSE: AQUA) designer, manufacturer and provider of water treatment solutions for the process, drinking and waste water needs of industrial and municipal customers. Revenues for the latest twelve months ended 30 September 2020 approximated $1.4 billion.
REGULATORY DISCLOSURES
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 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.
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.
Jadijhe (Gigi) Adamo 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 Russell Solomon 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
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