MetoKote Corp . , the largest independent provider of industrial coating in the U.S. , is adding debt to make dividend payments to private equity sponsor J.P. Morgan Partners or to repurchase no less than $30 million in stock. Proceeds will also be used to refinance existing debt and extend out maturities till 2010. Standard & Poor’s has assigned a B+ to MetoKote’s senior first-lien bank facilities which comprise a five-year, $30 million revolver and six-year, $125 million term loan. Wachovia Securities is set to lead the new debt.
In addition, S&P gave its recovery rating of “3” to the first-lien facilities, indicating a 50-80% recovery of principal in the event of a default. S&P also assigned MetoKote’s seven-year, $55 million second-lien term loan a B- rating and recovery rating of 5, indicating a 0-25% recovery of principal in the event of a default.
Moody’s Investors Service gave its B1 rating to the revolver and first-lien loan and B3 to the second-lien facility, saying the transaction will materially increase MetoKote’s leverage and weaken the company’s cash interest coverage and other credit protection measures.
MetoKote operates in a narrow niche and is vulnerable to demand swings for its specialty operation, according to S&P. The ratings reflect the company’s well-below-average business profile and the highly competitive and price-sensitive nature of the industrial coating business. Many of MetoKote’s competitors are larger entities that are the captive coating operations of original equipment manufacturers and with many small, single-plant companies, S&P notes. But the ratings do positively reflect the company’s integrated business, which consists of the design, building, installation and operation of coating equipment, making MetoKote the only company in the industry able to independently deliver this complete range of coating systems, S&P adds.
For the fiscal year ending October 2003, pro forma total debt outstanding was around $151 million. The new facility will improve MetoKote’s financial flexibility, since it will eliminate a material amount of debt amortization and extend current maturities to 2010 from 2004. The company is expected to generate about $12 million free cash flow in 2004 and its $30 million revolver is expected to be undrawn. S&P expects MetoKote to be able to average total debt-to-EBITDA of no more than four times during the next two years, with EBITDA interest coverage, after capital expenditures, exceeding two-and-a-half times. The outlook is stable. Calls to Patrick Osler , MetoKote’s cfo, were not returned.
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