Colfax Contends With Fragmented Market

Colfax Corp.'s competitive and fragmented market is a primary credit concern for Moody's Investors Service, said Charles Tan, v.p. and senior analyst. The fluid handling and power transmission product maker has considerable exposure to cyclical end-markets and is a relatively small entity in the highly competitive pump and power transmission industries, Moody's states. Moody's assigned a Ba3 rating to the proposed $315 million credit's $50 million revolver and $225 million "B" term loan, while the $40 million second lien "C" piece received a B1 rating. The facility backs Colfax's acquisition plans for German-based pump producer Netzsch Group for $113.4 million and will also refinance $145.1 million in existing debt.

Colfax's acquisitive growth strategy is another central source of concern reflected in the ratings, Tan added. Since 1995 the company has grown through seven acquisitions, including Netzsch, totaling $1.23 billion in revenues. At the same time, it has divested six businesses with $433 million in total revenues. Tan said it is still too soon to assess if the acquisition strategy has proven successful. "We are hoping they can do what they say they can do," he said, noting that factors such as the recession have left the company short on revenues. Asbestos and pension plan liabilities are another factor pressuring the ratings, Moody's adds.

On the positive side, the ratings are supported by the company's good market position with respect to its production of certain types of pumps, Moody's says, adding that moderate financial leverage and solid interest coverage further work in the company's favor. "Coverage is pretty good," Tan noted. Following the refinancing of Netzsch's debt, Colfax will have about $270 million in total debt, which is 3.6 times 2002 pro forma EBITDA. Colfax's strategy to relocate manufacturing facilities to low-cost locales should also keep its capex requirement at a relatively low level of $15-16 million a year or just over 2%, Moody's states. A Colfax official declined to comment.