Moody’s downgrades Floworks International to Caa3; outlook negative

Posted by Sana on 11/13/2016 in Weak Credit | Short Link

Approximately $221 million of rated debt securities affected

New York, October 06, 2016 — Moodys Investors Service downgraded Floworks International LLCs (Floworks)
corporate family rating to Caa3 from Caa1, its probability of default
rating to Caa3-PD from Caa1-PD and its senior secured note
rating to Ca from Caa2. The ratings outlook is negative.
The ratings downgrades and negative outlook reflect the substantial deterioration
in Floworks operating results, credit metrics and liquidity and
the expectation they will remain weak over the next 12 to 18 months.

The following ratings were affected in this rating action:

Corporate Family Rating, Downgraded to Caa3 from Caa1;

Probability of Default Rating, Downgraded to Caa3- PD from
Caa1-PD;

$221 Million Senior Secured Notes due 2019, Downgraded to
Ca (LGD5) from Caa2 (LGD4);

Outlook Actions:

Outlook, Remains Negative

RATINGS RATIONALE

Floworks Caa3 corporate family rating reflects its small size,
very weak credit metrics, negative LTM EBITDA generation,
reliance on the cyclical downstream energy sector, and the highly
competitive dynamics that is typical of the pipe, valve and fittings
(PVF) distribution sector. The ratings are supported by the companys
exposure to MRO activity, long-term relationships with large
and well-established customers as well as the countercyclical working
capital needs and limited capital expenditure requirements of the distribution
business model. The company also has an adequate liquidity profile
and no near term debt maturities.

Floworks recent operating results have been very weak driven by lower
capital spending by its downstream energy sector customers and intensely
competitive market conditions as upstream and midstream distributors migrate
to the downstream sector. The company has also been negatively
impacted by non-cash lower of cost or market inventory charges
related to declining nickel prices, which impact the price of its
stainless steel and nickel alloy pipe products, and obsolescence
write downs based on estimated net realizable value of older inventory.
Floworks recorded $30 million of non-cash inventory charges
during the fiscal year ended January 2016, which resulted in the
company producing an EBITDA loss of $15 million. The company
has not incurred additional inventory losses during the first half of
2016 (ends January 2017) since its inventory costs have become more in
line with market pricing. However, it has only produced adjusted
EBITDA of about $1 million including an EBITDA loss in the quarter
ended July 2016 and is likely to generate negative EBITDA again this fiscal
year. Therefore, its credit metrics will remain very weak
with negative leverage and negative interest coverage. Floworks
operating results could improve in fiscal 2017 (ending January 2018) if
oil prices strengthen or refinery maintenance and petrochemical project
activity picks up, but the upside will be limited since competitive
pressure is likely to remain intense.

Floworks has an adequate liquidity profile with about $3 million
of cash and $59 million of availability on its $175 million
ABL revolver as of July 31, 2016. The revolver had $72
million of borrowings and $11 million of letters of credit outstanding.
Floworks liquidity should remain adequate in the near term since it is
expected to be cash flow neutral in the second half of fiscal 2016.
It will continue to generate operating losses, but this will be
offset by cash generated from reduced investments in working capital.
The company is likely to be cash flow negative in fiscal 2017 and its
liquidity could become less than adequate unless business conditions improve
materially. The company has no debt maturities until September
2019.

The negative outlook reflects the likelihood that Floworks operating results
will remain under pressure, its credit metrics will stay weak for
its rating and it will continue to produce negative free cash flow in
the near term. The outlook could return to stable if operating
results and credit metrics improve substantially and the company produces
positive free cash flow. The leverage ratio (Debt/EBITDA) declining
below 9.0x and the interest coverage ratio (EBITA/Interest Expense)
rising above 0.75x could lead to an outlook change.

The ratings are not likely to experience upward pressure in the near term.
However, Floworks ratings could be upgraded if the companys leverage
ratio declines below 8.0x, interest coverage rises above
1.25x and it generates consistent free cash flow.

A downgrade would be considered if Floworks leverage ratio remains
above 9.0x, its interest coverage ratio is sustained below
0.75x and it continues to generate negative free cash flow.
A significant reduction in borrowing availability or liquidity could also
result in a downgrade.

The principal methodology used in these ratings was Distribution amp;
Supply Chain Services Industry published in December 2015. Please
see the Rating Methodologies page on www.moodys.com for
a copy of this methodology.

Floworks LLC, headquartered in Houston, Texas, is a
distributor and supplier of pipe, valves, fittings (PVF) and
related products to the energy and industrial sectors. The company
operates in two segments: Valves and Automation (60% of LTM
revenues) is a distributor of manual and automated valve products and
accessories for the petrochemical, refining, upstream and
midstream oil amp; gas, power generation, mining, marine
and other industrial end-markets; Pipe, Fitting,
Flanges (PFF) (40% of LTM revenues) is a distributor of pipe,
fittings, flanges and other products primarily for the petrochemical,
refining, mining and power generation industries. The company
operates out of approximately 40 branch locations throughout the United
States, Canada, Saudi Arabia and China and generated revenues
of $593 million for the trailing twelve months ended July 31,
2016.

REGULATORY

For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moodys
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support providers credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.

Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moodys legal entity that has issued
the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.

Michael Corelli
VP – Senior Credit Officer
Corporate Finance Group
Moodys Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Brian Oak
MD – Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moodys Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
USA.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moodys downgrades Floworks International to Caa3; outlook negative

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