France-Based Closure Systems Maker Stellagroup Rated Preliminary 'B'; Outlook Stable

  • Private-equity firm PAI Partners is acquiring Stella Group through Polaris Holding for an enterprise value of €635 million and, as part of this transaction, Stella plans to raise new debt and refinance its capital structure. The former owner ICG will remain a co-investor through a PIK instrument and a minority stake.
  • Stella designs and manufactures rolling shutters, metallic grills, and curtains for store protection, and offers differentiated products, such as aluminum-based motorized rolling shutters.
  • We are assigning our preliminary 'B' ratings to Stella's intermediate parent company Stellagroup and to the proposed €290 million Term Loan B due 2026, with a recovery rating of '3'.
  • The stable outlook reflects our expectation that Stella will continue to expand and realize efficiencies from integrating recent acquisitions, while sustaining high margins and positive free cash flows, with adjusted debt to EBITDA at around 6.5x in 2019-2020.
PARIS (S&P Global Ratings) Jan. 9, 2019--S&P Global Ratings today assigned its 
preliminary 'B' long-term issuer credit rating to Stellagroup, the 
intermediate parent company of Stella Group, a building material manufacturer 
headquartered in France. The outlook is stable.

At the same time, we assigned our preliminary 'B' issue rating to the proposed 
€290 million Term Loan B due 2026 to be issued by Stellagroup. The preliminary 
recovery rating is '3', reflecting our expectation of meaningful recovery 
(50%-70%; rounded estimate: 60%) in the event of a payment default.

At this stage, the proposed transaction includes shareholder loans, preferred 
equity shares, and other debt-like instruments throughout the corporate group, 
which we capture in our financial analysis, including our leverage and 
coverage calculations. The final ratings will depend on our receipt and 
satisfactory review of all final documentation and final terms of the 
transaction. The preliminary ratings should therefore not be construed as 
evidence of the final ratings.

If we do not receive the final documentation within a reasonable time, or if 
the final documentation and terms of the transaction depart from the materials 
and terms reviewed, we reserve the right to withdraw or revise the ratings. 
Potential changes include, but are not limited to, utilization of the 
proceeds, maturity, size, and conditions of the facilities, financial and 
other covenants, security, and ranking. 

The 'B' rating incorporates our assessment of Stella's fair business risk 
profile with our opinion that the group has a highly leveraged capital 
structure as a result of its private-equity ownership. PAI Partners is 
acquiring Stella from ICG, financing the deal with a €290 million senior 
secured term loan B. The contemplated structure will also include a €56 
million payment-in-kind (PIK) instrument held by ICG, along with a 
contribution from PAI in the form of equity and non-common-equity instruments 
totaling €308 million. 

We consider that financial leverage at acquisition is high, with the S&P 
Global Ratings-adjusted debt to EBITDA ratio at about 6.5x over the next 12-18 
months (5.5x excluding the PIK instrument, which we regard as debt). We also 
expect that Stella can maintain high margins and generate material free cash 

Stella is a leading manufacturer of rolling shutters, metallic grills, and 
curtains for store protection in France. It operates across five brands: La 
Toulousaine, with respect to garage doors, sectional doors, gates, grilles and 
shutters, and Profalux, Eveno, Sofermi, and Flip, in rolling shutters, blinds, 
and garage doors. The group has five production sites in France and around 860 
employees. For 2018, we expect Stella will report a turnover of €230 million 
and EBITDA of €55 million, including the acquisition of Flip on a pro forma 
basis, which closed in October last year. Stella has leading positions in the 
rolling shutter market, its main market, with an estimated 17% share, thanks 
to the integration of new businesses, such as Sofermi in 2017. Stella is also 
a market leader through La Toulousaine in the more mature metallic gates and 
curtains market.

Stella's brands are well recognized by professionals, independent retailers, 
and installers in the industry and associated with high-quality products and 
services. We see the market as highly fragmented, since it comprises mainly 
small local manufacturers and assemblers. Due to its strong local and regional 
presence and optimized manufacturing footprint, Stella can process orders and 
produce tailor-made rolling shutters and gates relatively quickly, with fast 
delivery across all key geographic areas of France.

Stella controls most of the production chain and is vertically integrated. Its 
flexible model provides a cost advantage and enables high profitability, with 
EBITDA margins at 23%-24%, compared with broader building material producers 
and its direct competitors, which are mainly assemblers rather than 
manufacturers. The current management team has been able to integrate and 
develop acquired businesses into the group's manufacturing processes, such 
that the operating margins of these brands have improved significantly over 
recent years.

Although Stella has a wide range of products and expertise in the rolling 
shutters and garage-door markets, the group operates exclusively in France. 
Rolling shutters represent the majority of sales (approximately 70%) and all 
other products follow the renovation/residential or 
replacement/non-discretionary industrial end markets. Although we consider 
that renovation and maintenance activity is more resilient than new-build 
construction through the credit cycle, we see Stella's reliance on this market 
and its small size relative to that of wider building materials producers as 
constraints to its business profile. With around €230 million of reported 
revenues and €55 million of EBITDA in 2018, Stella is one of the smallest 
companies we rate in the building materials industry.

Our assessment of Stella's financial risk profile is mainly constrained by the 
group's high debt, which we estimate at about €359 million at closing of the 
acquisition in January 2019. This results in S&P Global Ratings-adjusted debt 
to EBITDA of about 6.5x over 2019-2020. This stems from the group's 
private-equity ownership and potentially aggressive strategy in using debt and 
debt-like instruments to maximize shareholder returns in the takeover 
transaction and during the investment horizon. Our debt adjustments include 
the €56 million PIK instrument held by the non-controlling sponsor ICG and 
about €13 million of existing debt in the new structure. We also consider that 
yet-to-be finalized convertible bonds and preference shares held by PAI 
Partners qualify for equity treatment under our methodology, in light of its 
expected pricing, equity-stapling clause, and highly subordinated and 
default-free features. 

We project strong free cash flows of at least €20 million on a recurring basis 
in the coming years, since the company generates high margins and has only 
moderate capital investment needs. Although we do not deduct cash from debt in 
our calculation owing to Stella's private-equity ownership, we consider that 
excess cash flows offer some headroom for deleveraging. Moreover, the 
company's interest coverage ratios support the ratings, with EBITDA interest 
coverage at about 3.0x and funds from operations (FFO) covering cash interest 
payments by about 4.0x.

The stable outlook reflects our expectation that Stella will continue to 
expand and realize efficiencies from recent acquisitions, while sustaining 
high margins and free cash flows of at least €20 million per annum, with S&P 
Global Ratings-adjusted debt to EBITDA at about 6.5x (5.5x excluding the PIK 
instrument) over 2019-2020.

We could lower the rating if Stella's profitability and cash flow generation 
weakened due to deteriorated market conditions or operational issues. We could 
also lower the rating if the company adopted more aggressive financial 
policies--including debt-financed dividend recapitalizations or 
acquisitions--that resulted in a sizeable increase in leverage or interest 
coverage ratios declining toward 2x with low prospects for improvement. 

In our view, an upgrade over the next 12 months is unlikely, given the group's 
high leverage and potentially aggressive financial policy from the 
private-equity sponsor. However, we could raise the rating in the long term if 
the company reported adjusted leverage sustainably below 5x (including the PIK 
instrument) and FFO to debt stayed above 12%. In addition, a strong commitment 
from the private equity sponsor to maintain leverage commensurate with a 
higher rating would be important considerations for an upgrade. 
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