ThermaSys Corporation: S&P Downgrade

Standard & Poor’s downgraded API Heat Transfer -parent of API Heat Transfer ThermaSys Corp (“ThermaSys”) to CCC+ from B-.

At the same time, the credit rating company reduced the  issue rating on the ThermaSys operating subsidiary senior secured Term Loan & Revolver to the same rating level.

The commentary in the S&P press release said the parent’s capital structure was “unsustainable”.

“Debt leverage” is said to be 12X at September 30, 2016.

Weakness is due to conditions in the oil & gas and electric power generation end markets. Most of the press release is quoted below:

S&P Global Ratings said today 
that it has downgraded Buffalo, N.Y.-based API Heat Transfer Co. to 'CCC+' 
from 'B-'. 
The outlook is negative. 
 

At the same time, we lowered our issue-level ratings on operating subsidiary 
API Heat Transfer ThermaSys Corp.'s 5 million senior secured term loan and 
 million revolving credit facility to 'CCC+' from 'B-'. 
The '3' recovery 
ratings remain unchanged, indicating our expectation for meaningful (50%-70%; 
upper half of the range) recovery in a payment default scenario. 
 

"The downgrade reflects our expectation that API's credit measures will remain 
weak in 2017 as it continues to deal with the challenging demand conditions in 
its oil and gas and electric power generation end markets," said S&P Global 
credit analyst Christopher Corey. 
T
he company has been negatively affected by 
the sustained weak oil prices and reduced demand from the largest customers in 
its Air Cooled Group, API's largest segment by revenue (orders from these 
customers comprised roughly 20% of API's sales in 2015). 
Low commodity prices 
and persistent weakness in the mining industry have reduced the demand for 
some of API's electric power generation products. 
Because of this, the 
company's earnings have remained weaker than we expected in recent quarters. 

We estimate that delayed bookings and lower sales volumes from the company's 
key customers caused API's sales to decline by about 15% year-to-date as of 
September 2016, which has worsened its already weak credit metrics. 

Specifically, API's trailing 12 month debt-to-EBITDA metric increased to 12x 
as of Sept. 
30, 2016, from 10x as of Dec. 
31, 2015. 
Although we expect the 
company's operating performance to begin to recover in 2017, supported by 
management's continued cost-cutting efforts, we believe that API's 
debt-to-EBITDA metric will remain high at about 9.5x over the next 12-18 
months. 

 

The negative outlook on API reflects our expectation that the company's 
leverage will remain elevated at close to 10x and that its liquidity will 
remain constrained over the next year. 
In addition, a worse-than-expected 
level of cash flow generation could lead the company to increase the 
borrowings under its revolving credit facility to fund its required debt 
service, which may leave API unable to meet the springing financial covenant 
under the facility. 

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