Apex Tool Group LLC Issuer Credit Rating Lowered To 'B-' From 'B', Outlook Stable; Debt Ratings Also Lowered

  • U.S.–based tool producer Apex Tools Group continues to face cost inflation headwinds, margin pressure, and stagnant EBITDA despite top line growth in their segments.
  • We anticipate adjusted leverage will remain above 8x for 2019, because our expectation for EBITDA growth is lower than our previous forecast. We are revising Apex's liquidity to less than adequate from adequate, based on tight covenant headroom and step-downs in leverage covenants.
  • On April 2, 2019, S&P Global Ratings lowered its issuer credit rating on Apex Tool Group to 'B-' from 'B'. The outlook is stable. At the same time, we lowered our issue-level rating on the company's senior secured term credit facilities to 'B-' from 'B'. The '3' recovery rating is unchanged. We also lowered our issue-level rating on the company's senior unsecured notes to 'CCC+' from 'B-'. The '5' recovery rating is unchanged.
  • The stable outlook reflects elevated debt leverage above 8x over the next 12 months, but with sufficient interest coverage and cash flow to meet its obligations.
NEW YORK (S&P Global Ratings) April 2, 2019—S&P Global Ratings today took the 
above listed rating actions. The downgrade to 'B-' reflects Sparks, Md.-based 
Apex Tool Group LLC's inability to deleverage below 8x due to raw material 
cost inflation, tariffs, and ongoing restructuring charges despite revenue 
growth spurred by new products. Debt leverage has been in excess of 8x for at 
least the past seven quarters and was 9x as of Sept. 30, 2018. We expect the 
company's leverage will remain above 8x for at least next 12 to 18 months 
until recent restructuring expenses run off.


The stable rating outlook on Apex Tool Group LLC reflects elevated debt 
leverage above 8x over the next 12 months, but with sufficient interest 
coverage and cash flow to meet its obligations. We expect to see higher volume 
growth with price improvement in 2019, which should result in some 
year-over-year EBITDA growth. However, we can continue to expect mild 
headwinds from cost inflation and the potential of higher tariffs.


We could lower the rating within the next 12 months if U.S. commercial 
construction declined or input costs increased due to further tariff 
impositions, resulting in low enough EBITDA that Apex's debt leverage would 
exceed 10x and EBITDA interest coverage will move closer to 1x. Under our 
assumptions, this would require a deterioration in its EBITDA margin of over 
200 basis points. We could also lower the rating if the company's liquidity 
deteriorated sufficiently or if it breached its credit agreement covenants, 
losing access to its credit lines.


We could raise the rating within the next 12 months if the company were able 
to reduce adjusted leverage metrics to well below 8x and maintain interest 
coverage above 2x on a sustained basis. We would need to see Apex improve 
margins by 200 bps driven by improved market conditions and successful price 
increases while relieving pressures driven primarily by inflation, negative 
manufacturing variances, premium freight, and tariffs.

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