Morningstar DBRS Upgrades Mattr Corp. to BB, Positive from BB (low) Following Sale of Pipe Coating Division

DBRS Limited (Morningstar DBRS) upgraded the Issuer Rating of Mattr Corp. (Mattr or the Company, formerly Shawcor Ltd.) to BB from BB (low) and confirmed the rating on the Senior Unsecured Notes (the Notes) at B (high), all with Positive trends. The Recovery Rating on the Notes changed to RR6 from RR5 following divestment of the pipe coating division. These actions remove the ratings from Under Review with Positive Implications.

KEY CREDIT RATING CONSIDERATIONS
On August 29, 2023, following the Company’s announcement that it had signed a definitive agreement to sell a substantial part of its pipe coating division for US$166 million or approximately $225 million (the Disposition), Morningstar DBRS placed Mattr’s ratings Under Review with Positive Implications. At the time, Morningstar DBRS stated that assuming the Disposition closes as planned and the Company continues to execute solidly, Morningstar DBRS would likely upgrade Mattr’s Issuer Rating by at least one notch on close. Since then, the Company has closed the Disposition, which substantially improves Mattr’s business risk profile, benefitting from increased earnings stability, given the relatively higher earnings volatility associated with the pipe coating division, and higher full-cycle margins. Furthermore, the Disposition provides the Company with an improved liquidity position and consequently increased flexibility to invest in strengthening its existing businesses. Morningstar DBRS believes this overall improvement in Mattr’s credit risk profile is supportive of an upgrade of the Company’s Issuer Rating to BB from BB (low). The Positive trend reflects Morningstar DBRS’ expectation that the Company will continue to deliver sound operating performance while maintaining key credit metrics that are considered very strong for the current rating. Furthermore, the trends reflect Morningstar DBRS’ expectations that Mattr would prioritize the allocation of excess cash toward further improvements of the Company’s business risk profile either through organic or inorganic initiatives.

CREDIT RATING DRIVERS
Morningstar DBRS could take a positive rating action should Mattr’s business risk profile continue to strengthen as the Company expands its operational profile in the existing Composite Technologies and/or the Connection Technologies segments and/or other relatively stable industrial product segments, while maintaining key credit metrics at levels that are commensurate with a higher rating category. However, should the Company prioritize shareholder returns over growth opportunities and/or operating performance is weaker than expected, Morningstar DBRS could revert the Positive trends to Stable. Although unlikely in the near term, if credit metrics meaningfully deteriorate for a sustained period (i.e., debt-to-EBITDA increases above 3.5 times (x) with a commensurate weakening of the Company’s other key credit metrics) as a result of either weaker-than-expected operating performance and/or more aggressive financial management, the ratings could be pressured.

EARNINGS OUTLOOK
Going forward, considering the Disposition, Morningstar DBRS forecasts the Company to record sales close to $1.0 billion and $1.1 billion in 2024 and 2025, respectively, versus just under $1.0 billion forecast for the full-year 2023. A healthy long-term demand outlook across the product offerings in the remaining Composite Technologies segment (previously Composite Systems) and favourable long-term market trends for the Connection Technologies segment (previously Automotive & Industrial) should support sales growth. In line with revenue growth, Morningstar DBRS conservatively forecasts EBITDA to rise to more than $150 million in 2025 from above $130 million in 2024 versus EBITDA from continuing operations of close to $160 million forecast for the full-year 2023. Cash flow generation should remain robust but given the expectations of relatively higher capital expenditures, Morningstar DBRS expects free cash flow (before changes in working capital) to remain subdued at around $10 million in 2024 before improving toward $25 million in 2025. Morningstar DBRS anticipates the Company will use its free cash flow for debt reduction and/or shareholder remuneration. As such, excluding any meaningful debt funded acquisitions or returns to shareholders, Morningstar DBRS forecasts credit metrics to remain strong, even for the new rating category, with debt-to-EBITDA leverage remaining below approximately 2.0x in 2024 and 2025.

CREDIT RATING RATIONALE
The ratings are supported by the Company’s predominant leadership position in both of its business divisions, diminished exposure to the volatile pipe coating business, the Company’s diverse customer and geographic bases, strong technical expertise, and favourable long-term economic trends that should continue to support the business risk profile over the medium to long term. The ratings also consider Mattr’s relatively small scale, especially post the sale of the pipe coating division, fluctuating cost of raw materials, and the still-budding but growing water tank business.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024, https://dbrs.morningstar.com/research/427030).

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Mattr Corp., the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Mattr Corp., the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Mattr Corp., the BRA and the FRA carry approximately equal weight.

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

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Industrial Products Industry (February 14, 2023), https://dbrs.morningstar.com/research/409775/

The following methodologies have also been applied:
-- DBRS Morningstar Global Criteria: Recovery Ratings for Non-Investment-Grade Corporate Issuers (August 30, 2024), https://dbrs.morningstar.com/research/420063/

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/397223.

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 under Related Documents or by contacting us at [email protected].

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at [email protected].

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