LTI Holdings Downgraded To 'CCC+' On Unsustainable Capital Structure; Outlook Negative On Expected End-Market Weakness

  • Due to the rapidly deteriorating macroeconomic environment, we believe demand for LTI Holdings Inc.'s products will significantly weaken over the short-term. LTI has exposure to sectors including automotive and aerospace that we expect to be heavily affected by COVID-19.
  • Therefore, we expect LTI's leverage to remain above 10x, which we consider unsustainable.
  • As result, we are lowering our issuer credit rating on U.S.-based LTI to 'CCC+' from 'B-'. At the same time, we are lowering our issue-level rating on the company's $1.425 billion first-lien term loan along with the company´s $125 million revolving credit facility to 'CCC+' from 'B-' , and the rating on the company's $315 million second-lien term loan to 'CCC' from 'CCC+'. The recovery ratings are '4' and '5', respectively.
  • The negative outlook reflects our belief that the capital structure will remain unsustainable over the forecast period as a result of significantly weaker demand than we originally anticipated, with expectations for leverage above 10x throughout the period. We believe, however, that liquidity remains adequate, especially relative to similarly rated peers.
NEW YORK (S&P Global Ratings) March 25, 2020--S&P Global Ratings today took the rating actions listed above.
Leverage is extremely high and unsustainable, in our view.   By our estimates, LTI Holdings Inc. ended 2019 with leverage in the mid-10x range as result of lower-than-expected sales with some of its key customers. Furthermore, the company incurred a product liability in third-quarter 2019 that added approximately a turn of leverage. Economists at S&P Global Ratings now expect second-quarter U.S. GDP to decline by about 12% and for 2020 full-year GDP to be materially worse than expected. Therefore, we expect leverage to remain greater than 10x over the next 12 months given our expectations for significantly softer demand in LTI's end markets, as well as our expectations for some supply chain disruptions. However, we do expect the softer demand to be somewhat mitigated by the launch of new products at LTI's top customers, along with increased 5G infrastructure spending at Huawei.
The negative outlook on LTI reflects our belief that there is at least a one-in-three chance that we could lower the ratings should revenue and EBITDA decline in 2020 further than we expect, causing us to expect a default within a specified timeframe. We expect free cash flow generation to remain minimal over the next 12 months while leverage remains north of 10x over the next year.
We could lower our ratings on LTI if deteriorating operating performance results in a constrained liquidity position. This could occur, for example, from a deterioration in LTI's end markets and a collapse of supply chains, leading to large losses among the company's major customers. We could also downgrade the company if we came to believe free cash flow generation was materially worse than expected, leading us to envision a specific default scenario over the next six to 12 months.
We could revise our outlook to stable or consider a higher rating if the company's operations significantly improve, leading to deleveraging and a more sustainable capital structure, in our view. This could happen, for example, if the company is able to expand profitability through higher-than-expected sales in 2020 with healthy EBITDA margins. We would also need to see the resolution of the product liability issue, which would include attainment of insurance proceeds. Under this scenario, we would also expect the company to maintain sufficient liquidity.
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