DBRS Downgrades Armtec Issuer Rating to B and Debt Rating to B (low) with Negative Trend

DBRS has today revised the Issuer Rating of Armtec Holdings Limited (Armtec or the Company) to B from B (high) and the Instrument Rating of the Senior Unsecured Debt to B (low) from B. The trend for both ratings remains Negative. The recovery rating is unchanged at RR5.

The rating action reflects DBRS’s concerns over the financial stress and refinancing risks the Company will continue to face in the coming one to two years. Although the Company reported improved first quarter 2012 results due to favourable weather conditions and the effect of its Turnaround Plan (TP) execution so far, DBRS expects that headwinds facing the Company are still considerable and material improvement in financial metrics to levels supporting a B (high) issuer rating is unlikely in the next one to two years.

The negative trend reflects the risk that Armtec may not be able to improve its senior debt-to-EBITDA ratio on time to comply with the covenant of a maximum 5.0x, which will become effective on June 30, 2012. Achieving success in the TP and strong operating results in the next two quarters, which represent high seasons for the Company, is in our view critical to its ability to comply with financial covenants when they become effective and to alleviate its financial risks in the medium term. The trend could be revised to Stable if and when Armtec is able to reduce the likelihood of payment acceleration in the $125 million Brookfield Facility, either by demonstrating its ability to comply with its financial covenants or by obtaining permanent amendment of the covenants without punitive costs to the Company.

While DBRS recognizes the liquidity relief provided by the Brookfield Facility, we believe that Armtec’s operating cash flow would not likely to support material and imminent deleveraging, given its current highly geared capital structure and interest burden. Even assuming the full achievement of additional cash flow benefits from Armtec’s TP being implemented in 2012, we expect the Company’s coverage metrics to remain weak, with adjusted debt-to-EBITDA to exceed 7.5x and cash interest coverage of about 1.3-1.4x, both metrics considered consistent with its B rating. This is because the improved cash flows will be required to cover the large interest payments associated with the Brookfield facility, leaving limited resources for debt reduction. Although the Company’s decision to defer cash interest payments beginning March 2012 could help conserve liquidity, this could potentially increase future debt and interest burden, especially if revenue and cash flow during the typically high seasons in the second and third calendar quarters turn out to be lower than expected.

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

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