Fitch Rates Harsco's Senior Notes Offering 'BBB-'

CHICAGO--()--Fitch Ratings has assigned a 'BBB-' rating to Harsco Corporation's (Harsco) (NYSE: HSC) $250 million senior notes offering.

Pro forma for the issuance and cash tender offer to repurchase $250 million of 2.7% senior notes due October 2015, Fitch's actions affect approximately $918 million of total debt. The Rating Outlook remains Negative. A full list of current ratings follows at the end of this release.

The ratings and Outlook reflect Fitch's expectation Harsco's operating performance and free cash flow (FCF) will remain weak over at least the near-term due to the ongoing turnaround of the Metals segment, which represents nearly two-thirds of consolidated revenues.

Fitch anticipates flat organic revenue growth on a constant currency basis over the near-term, with unprofitable Metals contract churn and subdued global steel production offsetting solid demand in the Rail and Industrial segments. Longer-term, Fitch anticipates low single digit revenue growth, driven by faster growth in Industrial and Rail markets.

Profitability should remain modest but improve, driven by restructuring and the 2013 divestiture of the Infrastructure business. A richer sales mix in Metals also should strengthen profitability and Fitch expects operating EBITDA margin of more than 15% through the intermediate-term versus 14.7% for 2014.

Fitch expects FCF (cash from operations less capital spending less dividends) will remain challenged in the near-term, due to lower operating EBITDA, elevated capital spending to support growth opportunities in Rail, Industrial and resource recovery and environmental services. The ratings and outlook reflect Fitch's expectations for modest annual FCF approaching $100 million.

Credit protection measures should strengthen through the forecast period from profitability growth. Fitch estimates total leverage (total debt to operating EBITDA) was 3x for the latest 12 months (LTM) ended March 31, 2015 but the ratings and outlook incorporate Fitch's expectations total leverage will return to below 2.5x within the near-term. Interest coverage (operating EBITDA to gross interest expense) was a Fitch estimated 6.1x for the LTM ended March 31, 2015 but will exceed 7.5x over the near-term.

Solid operating performance in the higher margin Industrial segment (20% of sales) should continue, driven by increasing penetration in international markets. Developed markets have stabilized and are contributing to positive operating momentum. Fitch anticipates operating margin will remain in the mid-teens although may continue to decline with an increasing mix of international sales.

Expectations for increased diversification in Rail, which represents 15% of consolidated revenues, should mitigate concerns about uneven revenues and cash flows. Fitch anticipates operating profit margin will be in the mid-teens on average over the longer-term. Harsco entered into a number of new contracts that should drive revenue growth in the near term.

Harsco will sell $250 million of senior notes and use net proceeds to repurchase the existing $250 million of 2.7% senior notes due Oct 2015 pursuant to a concurrent tender offer, with any remaining net proceeds to repay borrowings under the revolving credit facility and general corporate purposes.

KEY RATINGS DRIVERS

Rating concerns include:

-- Continued weak operating performance in Metals with the benefits of extended restructuring initiatives constraining revenue growth and weighing on FCF, despite expectations for more profitable customer contracts;

-- Uneven revenues and FCF in the Rail business, given their project-oriented nature; and

-- Reduced customer and geographic diversification following sale of Infrastructure and Metals restructuring with a greater reliance on global steel production, which remains weak.

The ratings are supported by:

-- Fitch's expectations for the company's operating profile to strengthen with an improving sales mix and following the completion of the Metals restructuring, potentially driving operating EBIT margin to the high single digits;

-- Strong market positions in core growth end markets, including Rail and Industrial, as well as resource recovery and environmental services; and

-- Management's commitment to financial discipline through the Metals turnaround.

KEY ASSUMPTIONS

-- Flat organic revenue growth in the near-term on a constant currency basis, followed by the resumption of positive organic revenue growth through the intermediate-term.

-- Operating profit margin expansion, driven by cost savings from restructuring programs and a richer mix in Metals, partially offset by greater international sales.

-- Credit protection measures strengthen in the near-term from profitability growth.

-- Sustained positive annual FCF from structurally higher profitability.

RATING SENSITIVITIES

Negative ration actions could occur if:

-- Fitch expects Harsco will not sustain positive annual FCF from weaker than anticipated sales growth, elevated capital spending to support growth initiatives or weaker than expected profit margin expansion, indicating insufficient restructuring; or

-- Expectations total leverage will not be returned below 2.5x in the near-term, driven by weaker than anticipated operating performance.

Fitch could stabilize the ratings if the company realizes positive FCF approaching $100 million, driven by the combination of solid growth in Rail and Industrial and resumption of revenue growth and completion of restructuring in Metals.

Fitch believes liquidity at March 31, 2015 was sufficient and included:

-- $66.5 million of cash and cash equivalents, of which $3 million was located in the U.S.;

-- $353 million of availability under a $500 million revolving bank credit facility (RCF) expiring in March 2017.

Expectations for positive annual FCF beyond the near-term also should support liquidity.

Total debt was $919 million at March 31, 2015 included:

-- $147 million of borrowings under the RCF;

-- $250 million of senior notes maturing in 2015;

-- $450 million of senior notes due 2018; and

-- $72 million of other debt.

Fitch rates Harsco as follows:

-- IDR 'BBB-';

-- Senior unsecured credit facilities 'BBB-';

-- Senior unsecured debt 'BBB-'.

The Rating Outlook in Negative.

Date of Relevant Rating Committee: November 24, 2014

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985717

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https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson
Robert Curran, +1-212-908-0515
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Jason Pompeii, +1-312-368-3210
Senior Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Eric Ause, +1-312-606-2302
Senior Director
or
Committee Chairperson
Robert Curran, +1-212-908-0515
Managing Director
or
Media Relations, New York
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com