NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned first-time ratings to Dayton Superior Corporation as follows:
Dayton Superior Holdings, LLC
--Long-Term Issuer Default Rating (IDR) 'B'.
Dayton Superior Corporation
--Long-Term IDR 'B';
--Senior Secured ABL facility 'BB/RR1';
--Senior Secured Term Loan B 'B+/RR3';
--Preferred Units 'CCC+/RR6'.
The Rating Outlook is Stable.
REFINANCING
Dayton Superior is in the process of refinancing its $160 million term loan (T/L) B with a new $210 million T/L B that matures in five years. Proceeds from the issuance will be used to repay the existing T/L and reduce borrowings under the company's ABL facility.
Dayton Superior Holdings, LLC is the issuer of the consolidated financial statements. It is a holding company and is the direct parent of the guarantor, Dayton Superior Holdings, Inc. The borrower under the ABL facility and the new T/L B is Dayton Superior Corporation, a direct subsidiary of the guarantor.
KEY RATING DRIVERS
The rating for Dayton Superior reflects the company's leading market position in most of its business segments, extensive product and service offerings, and adequate liquidity position. The rating also takes into account the company's relatively small size, high leverage, ownership concentration, historically weak free cash flow (FCF) generation and somewhat limited end-market diversity.
The Stable Outlook reflects Fitch's expectation that demand for Dayton Superior's products will grow mid-single digits during the next few years as nonresidential construction spending (private and public) is projected to increase modestly in the near term. Fitch also expects the company's credit metrics will improve from current levels as Dayton Superior pays down debt from stronger FCF generation and profitability improves further from initiatives undertaken by the management team over the past few years.
LEADERSHIP POSITION/SMALL SCALE
Dayton Superior has an extensive product offering with strong market positions in each of its business segments. The company differentiates itself by providing an integrated solution (i.e. 'One Stop Shop') to a contractor's full requirement of concrete products and chemicals, as well as engineering services and logistics support. Dayton Superior has an extensive geographic footprint comprised of 10 manufacturing facilities, 10 rental yards and 19 distribution centers spread across North America.
While the company has leadership position in its various business segments, Dayton Superior has a relatively small scale with revenues of less than $400 million. Fitch believes that the company's small scale somewhat limits its purchasing and pricing power, as well as its capital markets access.
SOMEWHAT LIMITED END-MARKET DIVERSITY
Dayton Superior markets its products primarily to concrete-related applications and to the U.S. nonresidential construction sector. Management estimates that about 35% of its revenues are directed to the infrastructure segment, 30% to commercial and industrial construction and 30% to institutional construction. The company has limited exposure to the residential sector, accounting for only 5% of revenues. Typically, residential construction and commercial construction have differing cycles, which somewhat dampens the cyclicality of the construction sector. Fitch believes that this lack of end-market diversity increases the volatility of the company's revenues and profits.
CONSTRUCTION OUTLOOK
Fitch projects overall construction spending (Value of Construction Put In Place as measured by the Census Bureau) will expand mid-single digit percentage in 2017, including a 6% increase in commercial construction spending and 5% growth in public construction expenditures.
Fitch believes that highway spending will grow and remain relatively stable in the intermediate term given the certainty of funding from the federal government. On Dec. 4, 2015, President Obama signed into law a new five-year, $305 billion highway bill. This measure is the first long-term highway program put in place since the expiration of the last long-term highway bill in 2009. Spending will also be supported by state initiatives to fund highway projects. State governments continue to seek alternative revenue sources to fund highway projects, including increasing state gas and motor fuel taxes, raising sales taxes, and transferring general fund revenues to highway fund budgets. Several states have initiated some of these approaches and have also tapped the private sector to supplement funding for highway expenditures.
Fitch believes that the passage of a long-term highway bill, combined with state initiatives, will allow individual states to plan longer-term construction projects.
ADEQUATE LIQUIDITY POSITION
On a pro forma basis, Dayton Superior has adequate liquidity with available borrowing capacity under its $75 million ABL facility that matures in July 2020. The company's proposed T/L B requires quarterly amortization of $525,000.
WEAK FCF GENERATION
Dayton Superior generated negative FCF during the past two years due to higher rental fleet investments in 2014 and 2015. Fitch expects adjusted FCF (Fitch-calculated FCF plus cash proceeds from used equipment sales) will approximate 3.5% - 4.5% of revenues during 2017 as the company lowers its rental fleet investments.
IMPROVING MARGINS
Dayton Superior's revenues have been flat over the past two years but margins have improved meaningfully due in part to initiatives implemented by management. Fitch expects further improvement in EBIT margins in 2017.
CREDIT METRICS
Dayton Superior's credit metrics have been improving but remain relatively weak. Debt/EBITDA improved from 11.1x at the end of 2013 to 9.3x at year-end 2014, 8.1x at the conclusion of 2015 and 8.1x for the LTM period ending June 30, 2016. (Note: Fitch considers Dayton Superior's $196.4 million of preferred units as debt. Excluding the preferred units, debt/EBITDA for the LTM period was 4.3x.) Similarly, interest coverage improved from 2.2x in 2013 to 2.7x in 2014, 3.3x during 2015 and 3.2x for the LTM period ending June 30, 2016.
Fitch expects leverage will be below 8x by the end of 2016 and beneath 7x at the conclusion of 2017. Interest coverage is forecast to remain above 3x during the next few years.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for the issuer include:
--Overall U.S. construction spending grows mid-single digits during 2016 and 2017;
--Dayton Superior's revenues fall low-single digits in 2016 and improves mid-single digits in 2017;
--Further improvement in EBITDA margins in 2016 and 2017;
--Dayton Superior generates adjusted FCF margin of 3.5%-4.5% in 2017;
--Debt to EBITDA settles below 8x at the end of 2016 and approximates 7x by year-end 2017;
--Interest coverage is above 3x during the next few years.
RATING SENSITIVITIES
The company's ratings are constrained due to the relatively small scale of the company and limited end market diversity. However, positive rating actions may be considered if Dayton Superior expands the diversity of its end markets and the company shows meaningful further improvement in FCF generation and operating and credit metrics, including interest coverage sustained above 4x and funds from operations (FFO)-fixed charge coverage consistently above 3.5x.
Negative rating actions may be considered if there is sustained erosion of profits and cash flows due to either weak construction activity, meaningful and continued loss of market share, and/or ongoing cost pressures resulting in margin contraction and deterioration in credit metrics, including EBITDA margins below 12%, debt to EBITDA levels (preferred units classified as debt) consistently above 8x, FFO-fixed charge coverage routinely below 1.5x and interest coverage falls below 2.5x. Fitch will also review the ratings if the company consistently generates negative adjusted FCF.
RECOVERY ANALYSIS
The Recovery Rating (RR) of 'RR1' on Dayton Superior's senior secured ABL facility indicates outstanding recovery prospects for holders of this debt issue. The 'RR3' on the company's senior secured T/L B indicates good recovery prospects. The 'RR6' on the company's Class A and Class C preferred units indicate poor recovery prospects in a default scenario. Fitch applied a liquidation value analysis for these Recovery Ratings.
Date of relevant committee: Oct. 18, 2016.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and also non-recurring restructuring charges.
Additional information is available on www.fitchratings.com
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014287
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https://www.fitchratings.com/regulatory
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