Bright Bidco B.V. Ratings Lowered To 'CCC+' From 'B' On High Pace Of Cash Burn; Outlook Negative

  • Continued subdued demand for cars and mobile phones is hampering lighting manufacturer Bright Bidco B.V (Lumileds)'s free cash flow generation because gains from cost reduction programs, which will only be fully visible by 2020, do not compensate for the shortfall in revenue.
  • The pace of cash burn threatens the sustainability of the company's capital structure given Lumileds' high debt levels, with forecast debt-to-EBITDA significantly above 15x in 2019 and close to 10x in 2020; we continue to view the group's liquidity situation as adequate.
  • Therefore, on Sept. 6, 2019, S&P Global Ratings lowered its long-term issuer credit and issue-level ratings on Lumileds, to 'CCC+' from 'B'.
  • The negative outlook reflects the possibility that, amid weakening industry conditions, Lumileds' performance could fail to recover, leading to prolonged weak earnings and cash flows.
PARIS (S&P Global Ratings) Sept. 6, 2019--S&P Global Ratings today took the rating actions listed above .Despite management's actions to reduce costs and optimize working capital, we believe that Lumileds will generate negative free cash flows of about $55 million 2019 (compared with $51 million in 2018) due to continued market instability in both of the company's main end-markets: autos and mobile phones.
In the first half of 2019, Lumileds' revenues declined about 27% as the company was hit by falling auto vehicle production in China and Europe, destocking from dealers, declining global demand for smartphones, loss of volumes from a customer that moved to dual sourcing (smartphone producer), and price erosion. For the six months to June 2019, Lumileds' International Financial Reporting Standards (IFRS) EBITDA amounted to about $32 million (after about $9 million of restructuring costs), which is down from about $160 million the prior year. Its reported free operating cash flow amounted to negative $53 million (after $62 million of capital expenditure and $52 million of interest paid). There are no signs of imminent and meaningful recovery in the auto sector, one of Lumileds' main end-markets. In addition, we expect that the likely uptick in demand for smartphones after the introduction of 5G will not be enough to recover the volume lost from one of the company's specialty customers. We also expect cost savings initiatives will take time (the company anticipates about $80 million of additional gains by 2020, although we note that $23 million have already been booked in 2019).
While we consider Lumileds well placed to manage the structural shift from traditional lights for cars to LEDs from a technology standpoint, as demonstrated by recent platforms wins, we view the weakness of the Chinese and European auto markets as a major constraint on the company's business model. In the past few years, the pace of decline in revenue from the traditional lamps division has been somewhat regular, allowing the company to adjust its cost base in a timely manner. With the decline accelerating in the past few quarters, profitability of Lumiled's traditional lamps division had suffered from factory underuse. In the absence of recovery in demand, it will become more challenging for the company to pursue necessary investments in research and development (R&D) to keep up with rapid technological changes in LEDs and avoid commoditization of its products.
From a liquidity perspective, we believe that Lumileds' sources will cover its needs for the next 12 months. We also expect that Lumileds will be able to draw under its $200 million revolving credit facility (RCF; $15 million is drawn for letters of credit) if needed thanks to the lenient definition of the springing covenant, which allows add-backs such as pro forma cost savings and restructuring costs. Nevertheless, the company has very limited headroom for additional operational setbacks.
We forecast that, in 2019, Lumileds' debt-to-EBITDA ratio will rise to above 15.0x (from 6.8x in 2018) and its funds from operations (FFO) cash interest coverage will decline to about 1.0x (from 2.3x in 2018). For 2020, we expect these credit metrics to improve, with, for instance, debt-to-EBITDA close to 10x, thanks to the annualized impact of the company's cost-saving initiatives and lower volume declines.
The negative outlook reflects the possibility that, amid weakening industry conditions, Lumileds' performance could fail to recover, leading to prolonged weak earnings and cash flows. With the weak trading outlook and high leverage, we believe the group depends on favorable business conditions outside of its control to continue to meet its financial commitments in the medium term.
We could lower our ratings in the next 12 months if Lumileds' performance fails to meaningfully recover from the very weak levels of the past few quarters, continued high cash burn weakens liquidity, or financial restructuring became more likely.
We could revise the outlook to stable in the next 12 months if Lumileds restores positive free cash flow and its FFO cash interest coverage increases to above 2x.
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