DBRS Rates Armtec Holdings Limited BB (low)

DBRS has today assigned an Issuer Rating of BB (low) to Armtec Holdings Limited (Armtec or the Company) and a Senior Unsecured Debt rating of BB. The trends are Stable. Pursuant to the DBRS Rating Methodology for Leveraged Finance, a recovery rating of RR3 has been assigned to the Company’s Senior Unsecured Debt, which corresponds to the BB rating (see the Recovery Analysis section for details). The Issuer Rating largely reflects the Company’s strong market positions, well-diversified product mix and free cash flow generation, partly offset by the relatively high business risk facing Armtec related to its acquisitive nature and exposure to economic and construction cycles.

Armtec is the only national provider of infrastructure-related products in Canada, with leading market positions in its core end markets. The Company produces a broad range of construction infrastructure applications (CIAs) and engineered solutions (ES) products (see product descriptions in the Company Description section) for customers in the infrastructure (e.g., transportation, sewers and water treatment), residential, commercial and agriculture/natural resources end markets. Armtec’s CIA business, at just over half of its total business, has a material share of recurring maintenance sales, which helps offset the variability of its more project-specific (but higher-margin) ES business. In addition, government customers account for the largest share of sales, which limits credit risk and should help drive future growth in operating earnings given the positive infrastructure market outlook in Canada (where sales are predominantly based).

Armtec has consistently generated positive free cash flow (before working capital) annually, which provides a degree of financial flexibility. Free cash flow has historically been modest, largely due to high distributions to the Company’s unitholders, but capex requirements are low. While Armtec’s conversion to a fully taxable corporation (effective January 1, 2011) will ultimately lead to lower net earnings, dividends are expected to be reduced by the corresponding increase in taxes in order to preserve free cash flow.

Acquisitions have been the primary source of growth for Armtec over the past several years as most of its end markets are mature and opportunities for material organic growth are limited. This strategy is expected to continue beyond the current year and increases the Company’s business and financial risk, particularly given its relatively high debt levels for a cyclical company. As noted, Armtec’s operating results are exposed to economic and construction-market volatility, highlighted by the decline in its operating results in 2009 (when excluding the impact of acquisitions completed in 2008 and 2009) and H1 2010.

DBRS expects Armtec’s core credit metrics to be generally stable over the near to medium term, with adjusted debt-to-EBITDA in the low to mid-3.0 times range (as per DBRS calculations). EBITDA is likely to modestly decline in 2010 but gradually improve in 2011, notably from the progression of larger ES projects that were recently awarded. In addition, debt repayment obligations are not expected to be an issue. However, the outlook does not take into account acquisitions, which could lead to a disproportionate amount of debt relative to earnings and cash flow and add volatility and/or pressure to credit metrics.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodologies are Rating the Industrial Products Industry and DBRS Rating Methodology for Leveraged Finance, which can be found on our website under Methodologies.