Hoffmaster Group Inc. Rating Lowered To 'CCC+', Outlook Negative Due Coronavirus Fallout

The coronavirus outbreak is leading to a growing number of event cancellations and closures of restaurants, schools, and other institutions. An emphasis on social distancing is also causing restaurant traffic to weaken significantly.
We believe foodservice adjacent businesses will suffer significant near-term revenue and profit losses because of their reliance on these sectors.
As a result, we are lowering our issuer credit rating on U.S.-based Hoffmaster Group Inc. to 'CCC+' from 'B' and issue-level rating on the company's first-lien credit facility to 'CCC+' from 'B'. At the same time, we are lowering our issue-level rating on the company's second-lien term loan to 'CCC-' from 'CCC+'. The outlook is negative.
The negative outlook reflects our view that end markets will remain challenged over the next few months, resulting in reduced revenues and EBITDA that may result in negative free cash flow and cause the company to breach it springing net first-lien leverage ratio covenant.
NEW YORK (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions listed above. The recent outbreak of COVID-19 is disrupting the foodservice end markets in the U.S., representing about half of the company's revenues. There is substantial uncertainty around the scope and duration of the outbreak and any lingering effects on the economy and consumer behavior. The negative outlook incorporates our assessment of the economic uncertainty stemming from the effects of the virus as well as well as the company's ability to maintain its covenant compliance if it draws over 30% on its revolver, testing its springing first-lien leverage ratio covenant. Depending on the severity of the impact on the foodservice industry, the company may not be in compliance with its covenants if and when the covenants are tested.
The negative outlook reflects the potential for a lower rating due to a potential liquidity risk arising from its financial covenants and negative free operating cash flow, which could result in a default event occurring. Absent a material recovery in the end markets and profitability, we believe the capital structure is unsustainable.
We could lower our rating on Hoffmaster if sales and EBITDA decline materially due to the economic effects of the coronavirus pandemic, such that the company is forced to draw down on its revolver above 30%, springing the first-lien leverage covenant, causing a covenant breach.
While it is unlikely, we could revise our outlook to stable or raise our rating on Hoffmaster within the next 12 months if the company withstands the fallout from the pandemic better than anticipated. This means that sales and EBITDA would have to materially exceed our base case, generating free cash flow while preserving the capital structure, such that the risk of breaching the springing first-lien leverage ratio covenant significantly subsided.
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