Varnsen Industries Holdings Outlook Revised To Negative As Weak Economic Conditions Threaten Ability To Delever

  • We anticipate increasingly difficult demand conditions, given the steep decline in U.S. economic forecasts as a result of COVID-19, along with potential supply disruptions, could meaningfully impact Varnsen Industries Holdings S.a.r.l.'s ability to repay outstanding debt and improve credit measures.
  • We are revising our outlook to negative from stable and affirming our 'B' issuer credit rating on the company.
  • The negative outlook reflects the increased risk that weak demand and operational hurdles related to Varnsen's concentrated manufacturing operations could worsen credit measures and hinder the company's ability to reduce leverage below 6.5x.
CENTENNIAL (S&P Global Ratings) March 24, 2020--S&P Global Ratings today took the rating actions listed above.
A recession in the U.S. and Europe stemming from COVID-19 could weaken volume demand beyond our expectations.   S&P Global Ratings' economists now believe a recession in the U.S. and Europe is likely, as the fallout from the coronavirus is expected to meaningfully affect consumer spending and business investment. Although the severity and longevity of the COVID-19 pandemic remains uncertain, there is increasing risk that reduced demand will lower Varnsen's organic revenue growth in 2020. Our base-case forecast assumes positive free cash flow generation despite organic revenue declines. However, Varnsen's leverage is currently elevated due to the acquisition of Baileigh Inudstries, and sharply worse macroeconomic conditions could lead to deteriorating volume demand and weaker credit measures.
The negative outlook reflects the increased risk that weak demand and operational hurdles related to Varnsen's concentrated manufacturing operations could worsen credit measures and hinder the company's ability to reduce leverage below 6.5x.
We could lower our rating on Varnsen if the company meaningfully underperforms our expectations, resulting in declining free cash flow, greater borrowings under ABL facility, or leverage maintained above 6.5x with limited prospects for improvement. This could occur if continued weak U.S. economic and industrial conditions reduce demand further and the impact of the company's highly concentrated supply chain is greater than we anticipate, leading to elevated leverage and reduced liquidity.
We could revise our outlook to stable if the demand and margin impact of the current COVID-19 pandemic appear to be less severe, allowing the company to improve profitability and further deleverage such that we anticipated debt/EBITDA to be sustained below 6.5x.
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