Swiss Steelmaker Schmolz + Bickenbach Downgraded To 'B-' On Profit Warning And Unsustainable Capital Structure

  • Challenging market conditions have led Schmolz + Bickenbach (S+B) to announce a second profit warning after the previous one in July.
  • In our view, without a meaningful recovery in the European automotive and machinery industries in 2020, which is not our base case, the company's capital structure would become unsustainable.
  • The potential decline in cash flows would also have a knock-on effect on the company's liquidity position, which was already seen as tight. We now consider it as weak.
  • We are therefore lowering our ratings on S+B to 'B-' from 'B' and placing them on CreditWatch with negative implications.
  • The CreditWatch reflects the likelihood of a downgrade within the next few weeks, unless the company saw support from its shareholders and core banks.
PARIS (S&P Global Ratings) Sept. 13, 2019--The rating actions follow S+B's second profit warning in the past two months, with the company cutting its latest EBITDA guidance in half to €70 million-€100 million after weak operating results in July and August. Under our current base case, the company's capital structure is becoming unsustainable, with adjusted debt to EBITDA higher than 10x in 2019 and above 8x in 2020. In addition, the company faces a likely covenant breach in the second half of the year. In this respect, without any concrete signs of support from S+B's shareholders or core banks in the coming weeks, we are likely to lower the rating by one notch or more.
The CreditWatch indicates the likelihood that we could lower the ratings on S+B by another notch or more in the coming weeks, unless it obtains support from its shareholders and reaches an agreement with its core banks.
As part of the CreditWatch resolution, we will examine the company's ability to maintain a sustainable EBITDA of €150 million or more, an adjusted debt to EBITDA of no more than 6x during a downturn, and improving its liquidity position, including a fair amount of headroom under its credit facilities and sufficient sources to meet its obligation over the coming 12 months. Absent of meeting those, we could further lower the rating.
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