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Rating Action: Moody's affirms Terex's CFR at B1, downgrades sr unsec to B3; Outlook to negative
Global Credit Research - 24 Aug 2020
New York, August 24, 2020 -- Moody's Investors Service ("Moody's") affirmed Terex Corporation's ("Terex") corporate family rating ("CFR") at B1, probability of default rating at B1-PD, and senior secured rating at Ba2, downgraded the senior unsecured notes to B3 from B2, and upgraded the company's speculative grade liquidity rating to SGL-2 from SGL-3. Moody's is also withdrawing the debt rating and outlook at Terex International Financial Services Co. The multicurrency senior secured bank credit facility that was at this entity has been assigned a Ba2 at Terex Corporation. The rating outlook has been changed to negative.
The change to a negative outlook considers the particularly challenging market conditions for Terex's products and services which is likely to be weak for some time, partially mitigated by the actions the company has taken to reduce its cost structure and improve liquidity. The senior unsecured rating was lowered to B3 as Moody's removed the override in the loss given default analysis based on the company's liability structure and that if debt is added, the debt would likely be secured, thereby lowering the recovery prospects of the senior unsecured claims.
"Terex's financial leverage as of June 30, 2020 doubled since the beginning of the year, increasing to 6.6 times taking into account standard adjustments by Moody's. Debt-to-EBITDA is likely to weaken and may even exceed 10 times at year end 2020 before improving thereafter," said Moody's Vice President and lead analyst for Terex, Brian Silver.
Although Moody's does not anticipate a rapid snap-back in demand for Terex's specialized equipment, Terex's liquidity will be supported by over $1 billion of cash and revolver availability. Further, the expected replacement cycle for aerial work platforms (a core Terex product) will accelerate demand commencing in the back half of 2021 and help drive deleveraging.
Terex's B1 rating reflects the company's exposure to cyclical end-markets, which already demonstrated slowing demand and has been further exacerbated by the pandemic, resulting in significantly reduced demand for Terex's Aerial Work Platforms ("AWP") and Materials Processing ("MP") products. Terex generates low margins in AWP that Moody's expects will persist for the foreseeable future. Cash flow may be susceptible to very large working capital swings or inflationary pressure on input costs. Further, Terex has significant manufacturing exposure in Northern Ireland in its MP unit, which could be exposed to uncertainty over Brexit.
However, Terex benefits from having well established brands and solid market position, including its namesake Terex, as well as Genie, Powerscreen, and Fuchs among others. Terex also has good scale with $3.4 billion of revenue over the last twelve months, healthy customer concentration and good geographic diversification with a significant portion of its revenue generated outside of North America. Moody's expects that the company will manage inventories by aggressively keeping production in line with demand. In addition, the AWP replacement cycle could begin as soon as 2021, which could help spur growth. The ratings consider the company's good liquidity, and the steps management took to improve liquidity to position the company to manage through the weak recessionary conditions.
The SGL-2 speculative grade liquidity rating reflects good liquidity because of a healthy amount of cash and access to external liquidity. Terex had $426 million of cash at June 30, 2020, and Moody's expects the company to generate more than $50 million of free cash flow in 2020. Funds from operations will decline as a result of lower earnings, but working capital will benefit from the selling down of inventories as production levels remain curtailed.
Moody's believes that Terex has limited social risk, other than the operational challenges in staffing its production facilities. However, the company does have some environmental risk, and similar to other heavy manufacturers, generates hazardous and non-hazardous waste in the normal course operations and is subject to numerous environmental laws and regulations. Moody's also believes that Terex has limited governance risk, as the company is publicly traded and adheres to typical listing standards and has a well-defined board structure.
The secured rating of Ba2 takes into account the priority of claim the secured holders have with their first lien position, as well as the relative amount of unsecured claims which are in a first loss position.
The negative outlook reflects Moody's expectation that Terex will continue to encounter significant topline weakness over the several quarters as end-market demand slows, but liquidity will be good supported by solid cash and access to an undrawn $600 million revolver. The company is also expected to be able to deleverage quite rapidly when end market demand improves.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if debt-to-EBITDA is expected to be sustained above 7 times or forward free cash flow is likely to turn negative. Also, with a more aggressive financial policy with an increased focus on acquisitions or shareholder returns, or a material deterioration in liquidity, the ratings could be downgraded. Although not anticipated in the near-term, the ratings could be upgraded if debt-to-EBITDA is sustained below 3.5 times, free cash flow-to-debt is sustained above 5%, and the company can improve and sustain materially higher margins at AWP, in particular, and MP.
..Issuer: Terex Corporation
.... Corporate Family Rating, Affirmed B1
.... Probability of Default Rating, Affirmed B1-PD
....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD2)
..Issuer: Terex Corporation
....Senior Unsecured Regular Bond/Debenture, Downgraded to B3 (LGD5) from B2 (LGD5)
Upgrades: ..Issuer: Terex Corporation
.... Speculative Grade Liquidity Rating, Upgraded to SGL-2 from SGL-3
..Issuer: Terex Corporation
....Senior Secured Bank Credit Facility, Assigned Ba2 (LGD2)
..Issuer: Terex International Financial Services Co.
....Senior Secured Bank Credit Facility, Withdrawn , previously rated Ba2 (LGD2)
Outlook Actions: ..Issuer: Terex Corporation
....Outlook, Changed To Negative From Stable
..Issuer: Terex International Financial Services Co.
....Outlook, Changed To Rating Withdrawn From Stable
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 Westport, CT, Terex Corporation (NYSE: TEX) is a global manufacturer of lifting and material processing products and services. The company reports in two business segments: Aerial Work Platforms (AWP) and Materials Processing (MP). Terex delivers lifecycle solutions to a broad range of industries and offers financial products and services to assist in the acquisition of Terex equipment through Terex Financial Services. Terex generated revenue of about $4.5 billion for the twelve months ended June 30, 2020.
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.
Brian Silver, CFA 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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