Rating Action: Moody's upgrades some Sequa ratings (CFR to Caa2), assigns Caa1 (Caa3) ratings to new first (second) lien debt
Global Credit Research - 28 Jul 2020
"/LD" designation appended to Caa2-PD probability of default rating following limited default; outlook stable
New York, July 28, 2020 -- Moody's Investors Service ("Moody's") upgraded its ratings for Sequa Corporation ("Sequa"), including the company's corporate family rating (CFR, to Caa2 from Caa3) and probability of default rating (to Caa2-PD from Caa3-PD). For Sequa Mezzanine Holdings L.L.C., Moody's assigned a Caa1 rating to the company's first lien senior secured credit facilities comprised of a revolving credit facility due 2023, a term loan due 2023, and a new first lien term loan due 2025. Moody's also assigned a Caa3 rating to the company's senior secured second lien term loan due 2024. Concurrently, Moody's downgraded ratings on the existing first lien revolver due 2021 and existing first lien term loan due 2021 to Caa3 from Caa2. Moody's also affirmed the Ca ratings on the existing second lien term loan due 2022. An "/LD" designation was appended to the Caa2-PD probability of default rating following the company's deemed limited default event that has transpired concurrent with the recent successful closing of its restructuring transaction. Moody's will remove the "/LD" designation from the company's PDR after three days. The ratings outlook is stable.
The rating actions follow the company's recent extension of its existing capital structure across its first and second lien tranches, and incremental $256 million capital raise comprised of a $200 million first lien term loan and $56 million in preferred equity. Proceeds from the new capital will be used to repay borrowings under the revolver, repay a portion of first and second lien term loans, and to fund cash to the balance sheet and pay associated fees and expenses.
Moody's believes the proposed transaction constitutes a distressed exchange, given the nature of the transaction which subordinates claims of non-extending lenders and affords sub-market rates for extending lenders, including a payment-in-kind (PIK) option instead of cash for a component of interest expense. The preceding rating actions are predicated on the assumed successful completion of the transaction in substantially the same form as contemplated when the transaction was initially launched.
The upgrades recognize the moderately reduced financial risk on a go-forward basis that will come from Sequa's extended maturity profile, as well as the improved financial flexibility that will allow the company to better navigate earnings headwinds in the aftermath of the coronavirus pandemic. The upgrades also consider Sequa's improved liquidity profile, with full availability under its revolving credit facility, amended and less restrictive financial covenants, and increased cash on hand.
The Caa2 corporate family rating continues to incorporate Sequa's weak financial metrics and the cyclical nature of its aerospace and metal casting markets that are expected to be vulnerable to disruption in a weakened macroeconomic environment through at least the balance of 2020. Moody's expects earnings headwinds from the coronavirus, a high interest burden, and on-going business investments to collectively weigh on cash generation such that positive free cash flow is unlikely to be achieved until 2022. Weak cash flows will coincide with the company's highly leverage balance sheet (Moody's adjusted debt-to-EBITDA of around 7x as of March 2020) and a noisy earnings profile, involving multiple add-backs to EBITDA.
Moody's views Sequa's Chromalloy segment (60% of sales) as highly susceptible to coronavirus disruptions, with particular earnings pressures facing its high margin commercial aftermarket business. Somewhat countering this is the expectation that the company's Precoat business (40% of sales) will remain comparatively more stable and should continue to produce relatively heathy levels of earnings and cash flows.
The ratings downgrade on the existing first lien revolver due 2021 and term loan due 2021 reflects the expected subordination of these claims relative to extending first lien lenders who will benefit from a first-out provision relative to non-extending lenders in the 2021 tranche.
The rapid spread of the coronavirus outbreak, the deteriorating global economic outlook, low oil prices and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. Notwithstanding some early signs that the adverse impact of the coronavirus outbreak on Sequa and the deterioration in credit quality that it triggered may be relatively short-lived and subsiding, the company remains vulnerable to shifts in market demand and changing sentiment in these unprecedented operating conditions.
The stable ratings outlook incorporates expectations that Sequa's precoat business will remain relatively stable over the next 12-18 months, and also considers the improved financial flexibility that is provided by the extended capital structure and increased availability under the revolver.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Factors that could lead to an upgrade include stronger operational performance than is expected over the next 12 months, and if Sequa's earnings profile holds up better than expected during through the coronavirus disruptions.
Factors that could lead to a downgrade include weakening liquidity, involving meaningful drawdowns under the revolver, a potential breach of financial covenants or a level of cash burn that is more pronounced that currently contemplated. Meaningful reductions in earnings and cash flow generation in the company's Precoat segment or a further weakening in commercial aerospace markets could also result in a ratings downgrade.
The following summarizes today's rating actions:
Issuer: Sequa Corporation
Corporate Family Rating, upgraded to Caa2 from Caa3
Probability of Default Rating, upgraded to Caa2-PD/LD from Caa3-PD
Outlook: changed to Stable from Negative
Issuer: Sequa Mezzanine Holdings L.L.C.
New First lien senior secured bank credit facility due 2023, assigned Caa1 (LGD3)
New First lien senior secured bank credit facility due 2025, assigned Caa1 (LGD3)
New Second lien senior secured bank credit facility due 2024, assigned Caa3 (LGD5)
Existing First lien senior secured bank credit facility due 2021, downgraded to Caa3 (LGD5) from Caa2 (LGD3)
Existing Second lien senior secured bank credit facility due 2022, affirmed Ca (LGD5)
Outlook: changed to Stable from Negative
Sequa Corporation, headquartered in Palm Beach Gardens, Florida, is a diversified industrial company operating in two business segments: Aerospace, through Chromalloy Gas Turbine, and metal coating, through Precoat Metals. Sequa was purchased via a $2.8 billion LBO by affiliates of Carlyle Partners V, L.P. (Carlyle) in December 2007. Revenues for the twelve months ended March 2020 were $1.5 billion.
The principal methodology used in these ratings was Aerospace and Defense Methodology published in July 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1224306. 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.
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.
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Eoin Roche 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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