Rating Action: Moody's affirms Assemblin's B2 CFR following bond tap; outlook remains stable

Global Credit Research - 28 Jan 2021

Frankfurt am Main, January 28, 2021 -- Moody's Investors Service ("Moody's") has today affirmed the B2 corporate family rating (CFR) and B2-PD probability of default rating (PDR) of Assemblin Financing AB (Assemblin), a Sweden-based provider of installation services mainly related to electricity, heating, sanitation and ventilation. Concurrently, Moody's has also assigned a B2 instrument rating to the proposed E100 million tap to its senior secured notes due in 2025 and affirmed the B2 rating for the existing E250 million senior secured notes due 2025. The outlook on all ratings remains stable.

RATINGS RATIONALE

The rating affirmations follows Assemblin's announcement that it intends to fund the purchase price for the Fidelix Holding Oy (Fidelix, unrated) acquisition and additional liquidity through a E100 million upsizing of the existing E250 million senior secured notes and E20 million equity contribution from the sponsor.

Following the proposed acquisition financing and the consolidation of Fidelix, Assemblin's leverage will increase reflecting the purchase price multiple of the acquisition. Pro forma of the transaction and before synergies, Moody's estimates that the company's leverage ratio (defined as gross Debt/EBITDA with Moody's adjustments) will stand at around 6.0x at end-2020. Moody's positively notes the company's track record of positive free cash flow (FCF) which is expected to be sustained and which could further strengthen the company's financial flexibility going forward.

The affirmation of the B2 CFR reflects Moody's expectation of a gradual deleveraging in the next 18 months, supported by the visibility into earnings from the existing backlog, the company's profitability improvement initiatives and earnings contribution from previous acquisitions. Given the fact that the Moody's-adjusted leverage will be at the downgrade trigger after closing, there is limited headroom within the current rating category to absorb any further leverage increase which could be caused for example by operating underperformance, future debt-funded acquisitions or shareholder returns.

With annual sales of E45.5 million and reported EBITDA of E6.1 million for the fiscal year ended September 2020, Fidelix acquisition is relatively moderate in size compared to Assemblin's overall scale. This acquisition will increase the company's exposure to the building automation market, which has solid growth fundamentals supported by long-term structural trends, and will add to its overall market presence in Finland. It also improves the company's market positioning including a higher technological content of its service offerings.

The B2 rating of Assemblin continues to reflect its: (1) strong market position as Sweden's second largest provider of installation services; (2) asset-light service business with flexible cost structure enabling swift adjustments to shifts in the cycle; (3) short but meaningful evidence of margin expansion, albeit from a low base; and (4) Moody's expectation of continued positive FCF generation, which is expected to be used for bolt-on M&A that support earnings growth.

However, the rating is constrained by: (1) high leverage with Moody's-adjusted debt/EBITDA estimated at around 6.0x at end-2020 on a pro forma basis; (2) high concentration in Sweden, although gradually reduced with the Fidelix acquisition; (3) its exposure to the overall health of the cyclical construction industry, and (4) fairly aggressive financial policies evidenced by shareholder distributions and debt-funded acquisitions.

LIQUIDITY

Assemblin's liquidity is adequate and will improve with the proposed transaction. The liquidity profile benefits from the company's track record of positive FCF generation is expected to be sustained. It is supported by a cash balance of around SEK507 million as of the end of the third quarter of 2020 and an undrawn revolving credit facility (RCF) of SEK450 million due 2024, which will be upsized to SEK640 million upon closing. These sources, together with internally generated funds from operations, will be used to cover intra-year working capital swings, with a build-up during the second and third quarters, and a subsequent release in the fourth quarter and the first quarter of the next year. Other uses include annual capital spending, lease payments and spending on bolt-on M&A. The RCF contains a springing net leverage financial covenant tested only when the facility is more than 40% drawn.

STRUCTURAL CONSIDERATIONS

Assemblin's capital structure consists of a senior secured bond and a super senior secured RCF. The senior secured notes are rated B2 and are ranking behind the RCF with respect to recoveries upon enforcement.

Both instruments are guaranteed by subsidiaries of the group's holding company Assemblin Holding AB, and certain subsidiaries which account for at least 80% of consolidated EBITDA and are secured by pledges over shares in group companies and intercompany loans. Given the weak collateral value of such assets in a potential default scenario, the loss given default analysis treats these instruments as unsecured.

OUTLOOK

The stable rating outlook reflects Moody's expectation that Assemblin's credit metrics will be improved back to the requirements for the B2 rating category over the next 12 to 18 months, such that its Moody's-adjusted debt/EBITDA will be improved towards 5.0x in 2022, as consequence of continued organic growth, profitability improvements supported by the expected successful integration of the recent acquisitions. It also reflects Moody's expectation of positive FCF generation in 2021 and beyond.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upward pressure on the ratings could come from

- Moody's-adjusted debt/EBITDA sustainably below 4.5x;

- A material improvement in operating performance with Moody's-adjusted EBITA margin increasing towards high single digits

- High single digit Moody's-adjusted FCF/Debt and preservation of a solid liquidity profile

Downward pressure on the ratings could result from

- Moody's-adjusted debt/EBITDA sustainably above 6.0x;

- Moody's-adjusted EBITA margins declines below 5%

- Negative FCF generation

- Signs of an even more aggressive financial policy, debt-funded M&A or a weakened liquidity profile

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

COMPANY PROFILE

Headquartered in Stockholm, Assemblin is the second-largest installation company in Sweden, with installation services in electrical, heating and sanitation (H&S), and ventilation. The company has over 160 branches, and over 5,800 employees, serving various subsectors of the Nordic construction industry. For the 12 months that ended September 2020, the company reported revenue of SEK10.1 billion and EBITA of SEK313 million. The company was created in November 2015, when the current owner Triton acquired the Nordic perimeter of the bankrupt estate of Royal Imtech.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's 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 provider's 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's 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.

Svitlana Ukrayinets Analyst Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Christian Hendker, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454

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