France-Based Delachaux 'B+' Rating Affirmed On Acquisition And Refinancing; Outlook Stable

  • On Feb. 28, 2019, Delachaux S.A. completed the acquisition of Austria-based Frauscher for an enterprise value of about €230 million, which it partly funded via a €160 million incremental facility under its existing term loan and equity.
  • At the same time, Delachaux launched the refinancing of its capital structure with a new €855 million senior secured term loan B.
  • We are affirming our 'B+' long-term issuer credit rating on Delachaux.
  • We are also assigning our 'B+' issue rating and '3' recovery rating to the group's proposed senior secured term loan.
  • The stable outlook reflects our expectation that Delachaux will continue to demonstrate steady growth across its key divisions, generate consistent positive free cash flow, and improve its EBITDA margin to 14%-15% over the next 12 months.
PARIS (S&P Global Ratings) March 15, 2019--S&P Global Ratings today took the 
rating actions listed above. The affirmation reflects our view that 
Frauscher's stronger profitability and the potential for free operating cash 
flow (FOCF) generation will offset increased indebtedness stemming from the 
acquisition. We therefore expect that, after a peak in adjusted debt to EBITDA 
of 6.5x in 2019 (or 7.7x including preferred shares owned by CDPQ), it will 
return to 6.0x in the following year (7.3x including preferred shares). At the 
same time, we anticipate that Delachaux's (the group) unadjusted free 
operating cash flow (FOCF) could exceed €50 million in 2020, compared with €30 
million-€35 million per year in 2018 and 2019. 

Delachaux plans to issue a new €855 million seven-year term loan B that it 
will use to repay its outstanding €637 million term loan B maturing in 2021, 
fund the acquisition, and repay €30 million of drawn overdrafts. We note that 
the group's shareholders, CDPQ and the Delachaux family--as well as 
Frauscher's management team--have contributed €36 million in equity to finance 
the acquisition. The refinancing package also includes a new €75 million 
revolving credit facility (RCF), which will remain undrawn.

We base the stable outlook on our expectation that Delachaux will continue to 
demonstrate steady 2%-3% expansion across its key divisions, while at the same 
time befitting from the integration of the faster-growing and more profitable 
Frauscher business. We expect the EBITDA margin will return to 14%-15%, while 
FFO to debt--excluding preferred shares--will remain at 8%-9% over the coming 
12 months. We also expect Delachaux to consistently generate positive FOCF of 
at least €30 million per year in 2018 and 2019. 

We could consider a positive rating action if Delachaux's debt to EBITDA 
reduced to less than 5.0x, excluding preferred shares, and FFO to debt rose 
above 12%, with shareholders demonstrating a strong commitment to maintaining 
these levels on a sustainable basis. 

We could lower the ratings if Delachaux's EBITDA margin declined to about 12%, 
FOCF dropped below €30 million, and FFO cash interest coverage weakened to 
less than 2.5x with no near-term recovery prospects. Significant debt-funded 
acquisitions, dividend recap, or other shareholder distributions that put 
pressure on liquidity or significantly increase leverage, could also trigger a 
downgrade.