Praesidiad Outlook Revised To Negative On Weaker Than Expected Operating Performance; 'B-' Ratings Affirmed


  • Praesidiad Group Ltd.'s 2018 revenues and S&P Global Ratings-adjusted EBITDA were weaker than expected, declining by about 12% and 93%, respectively from 2017 levels.
  • We expect that cost savings measures carried out in 2018 and improving revenue prospects will lift EBITDA margins to about 7%-8% in 2019, up from 0.4% in 2018.
  • At the same time, we anticipate continued negative free operating cash flow of about €15 million in 2019, partly due to significantly higher IT investments.
  • We are revising the outlook on Praesidiad to negative from stable. We are affirming our 'B-' long-term issuer credit rating and our 'B-' issue rating with a '4' recovery rating on the €320 million senior secured term loan B.
  • The negative outlook reflects our view that although management has begun to implement a credible restructuring plan that would lead to stronger credit metrics, execution risks remain and visibility on the revenue turnaround remains limited. Material deviation from management's plan, such as weaker topline trends, higher than expected restructuring costs, or continued significant negative free operating cash flows would lead us to lower the ratings.
LONDON (S&P Global Ratings) April 15, 2019--S&P Global Ratings today took the rating actions listed above. The outlook revision reflects Praesidiad's weaker than expected operating performance for 2018, primarily due to lower revenues and higher than expected restructuring charges. We expect continued low visibility on the company's revenues and now forecast negative free operating cash flow (FOCF) of about €15 million in 2019 and about €4 million in 2020, compared with negative €7.5 million in 2018. However, we recognize that the FOCF decline is primarily related to higher IT investments and working capital outflows, which offset the improved EBITDA generation in our base case. We expect the negative FOCF to reduce liquidity headroom and potentially require increased revolving credit facility (RCF) utilization. We note that Praesidiad currently has 30.5% EBITDA headroom under the springing leverage covenant, set at 8.12x debt coverage, if the RCF is more than 35% drawn. The covenant test is based on pro forma EBITDA, which was €54.0 million as of December 2018.
Praesidiad's 2018 S&P Global Ratings-adjusted EBITDA contracted to €1.7 million in 2018 from €25.9 million in 2017. This was due to €30.1 million of restructuring costs, nearly double our previous expectations of €15 million. We expect with the implementation of a new enterprise resource planning (ERP) system, capital expenditure (capex) will peak at around £20 million in 2019, countering any benefits from already executed hard cost savings (such as the closure of the Sheffield plant) and redundancies.
We anticipate that credit metrics will strengthen materially in 2019 from low levels in 2018, with adjusted funds from operations (FFO) cash interest coverage increasing to 1.9x-2.0x. In addition to the negative FOCF, the company's liquidity will be burdened by a net cash outflow of €13.2 million for the acquisition of protective infrastructure provider, Drehtainer, which will be completed second-quarter (Q2) 2019. Drehtainer recently provided Mobile F-35 command posts to the Netherlands.
We adjust Praesidiad's financial year 2018 reported debt for about €4.7 million of operating leases and €32.3 million of trade receivables securitization. We also note €426.2 million of preference shares relating to the shareholder loan (outside the banking group), which we treat as equity under our criteria.
Our business risk profile for Praesidiad incorporates a reduced manufacturing footprint and lower-than-average profitability, including restructuring efforts, compared with other capital goods companies. We also see as a weakness the company's large share of revenue from base-line products (about 60%), which we see as more commoditized and therefore exposed to higher competitive pressures, as demonstrated in the 2018 results. This is balanced by Praesidiad's leading position in its niche within the global perimeter protection market. The company intends to focus on high security products and a new cost efficiencies program. In our view, this will help bolster margins, although from a low level.
Praesidiad is headquartered in the U.K. and £30 million in revenues go through U.K. facilities, creating potential foreign exchange exposure. Nevertheless, we view the effect of a no-deal Brexit on Praesidiad as relatively minimal and not a main driver for the company's credit quality.
The negative outlook reflects our view that although management has begun to implement a credible restructuring plan that would lead to stronger credit metrics, execution risks remain and visibility on the revenue turnaround remains limited. Material deviation from management's plan, such as weaker topline trends, higher than expected restructuring costs, or continued significant negative FOCF would lead us to lower the ratings.
We could lower the ratings if S&P Global Ratings-adjusted EBITDA margin improvements were not in line with our assumed base case, under which we foresee an increase to about 7%-8% in 2019. A protracted decline in earnings that would limit the company's ability to fully draw its RCF due to covenant restrictions could also lead us to lower the rating. We could also downgrade Praesidiad if FOCF declined below £15 million in 2019 coupled with limited prospects of about break-even FOCF in 2020.
We would revise the outlook to stable if the company performs in line with its 2019 budget. This would include positive FOCF and no cost overruns or delays with regards to the implementation of the remaining restructuring or the ERP system.
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