DBRS Downgrades Armtec Holdings Limited; Ratings Remain Under Review with Negative Implications

DBRS Limited (DBRS) has today downgraded the Issuer Rating of Armtec Holdings Limited (Armtec or the Company) to CC from B (low) and its Senior Unsecured Debt (the Notes) Rating to C from CCC (high), with both ratings remaining Under Review with Negative Implications. The recovery rating on the Notes has also been lowered to RR6 from RR5, indicating DBRS’s expectation of minimal (0% to 10%) recovery in an event of default. The rating actions follow a Company press release on February 25, 2015, through which Armtec announced (1) the execution of an Extension Agreement with Brookfield Capital Partners Fund III L.P. (the Fund), which extends the covenant waiver and upsizing of the short-term credit facility to $20 million, both expiring May 11, 2015; (2) the commencing of a Sale and Investment Process to solicit interest in a sale of (or investment in) Armtec; and (3) an agreement with the Fund on the course of actions (referred to as the “Brookfield Transaction”) if no satisfactory transaction emerges from the Sale and Investment Process.

If the Brookfield Transaction is implemented, the Fund will, through a new entity (Newco), acquire all of Armtec’s assets in exchange for its indebtedness to the Fund; assume Armtec’s obligations to its trade creditors and employees; and deal with Armtec’s other secured creditors in a manner acceptable to the Fund, Armtec and the creditors. The announcement also stated that Armtec has agreed not to pay the upcoming interest payments on the Notes due March 22, 2015, (with a cure period of 30 days) unless the indebtedness to the Fund is paid in full, and that under the Brookfield Transaction, neither Newco nor the Fund will assume any of Armtec’s obligations under the Notes.

The downgrade on Armtec’s issuer rating to CC reflect DBRS’s view that Armtec’s defaulting on unsecured debt obligations is highly likely, which is consistent with DBRS’s definition for its CCC or weaker ratings, despite the temporary relief provided by the covenant waiver and credit facility. The Company’s agreement not to pay interest to the Notes unless its indebtedness to the Fund is paid further limits Armtec’s ability to service its debt and avoid a payment default. Although it is still possible that an interested party may be found to buy or recapitalize Armtec, DBRS opines that the challenging operating and demand conditions facing the Company and its heavy debt burden would make finding a party quite unlikely.

The downgrade of the rating on the Notes to C further reflects DBRS’s expectation that Armtec’s agreement with the Fund as announced has materially weakened the recovery prospect of unsecured creditors, especially in the event of the Brookfield Transaction, which requires the Company to sell all of its assets to the Fund or Newco. The requirement will limit Armtec’s ability to remain a solvent operating company and to service the Notes, because all of its assets will be sold and because of the explicit statement in the announcement that Newco or the Fund will not assume any of the Company’s unsecured debt obligations. As a result, DBRS believes that lowering the recovery rating to RR6, indicating a minimal recovery prospect, and lowering the Notes’ rating to C is now appropriate. DBRS also notes that the gap between the issuer rating of CC and the Notes’ instrument rating of C is wider than the two-notch differentials usually assigned to a debt with a recovery rating of RR6, and deems the wider gap appropriate in view of the relatively high chances of Armtec’s being involved in a default situation.

In maintaining Armtec’s ratings Under Review with Negative Implications, DBRS indicates that future events in the next three months could potentially cause payment default to occur and the rating to lower further.

Notes:

• Financials are based on Armtec Infrastructure Inc. (Armtec Holdings Limited issued the Senior Unsecured Debt)

All figures are in Canadian dollars unless otherwise noted.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Rating Companies in the Industrial Products Industry (June 2015), DBRS Criteria: Financial Ratios and Accounting Treatments – Non-Financial Companies (January 2014) and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers (February 2015), which can be found on our website under Methodologies.