LONDON (Standard & Poor's) Dec. 22, 2010--Standard & Poor's Ratings Services
said today that it has revised its outlook on U.K.-based lead producer Eco-Bat
Technologies Ltd. to stable from negative. At the same time, Standard & Poor's
affirmed its 'B+' long-term corporate credit rating on the company and its
'B+' issue rating on Eco-Bat's ?176 million senior unsecured bond due 2013.
The recovery rating on the bond is unchanged at '3', indicating our
expectation of meaningful (50%-70%) recovery for senior noteholders in the
event of payment default.
"The outlook revision reflects our opinion that, with large cash surpluses in
hand and a limited investment plan, Eco-Bat is seeking ways to reduce its
expensive debt burden," said Standard & Poor's credit analyst Elad Jelasko.
"Eco-Bat's liquidity position and its redemption in April 2010 of 25% of its
outstanding debt support our opinion."
However, Eco-Bat's repayment risk could increase by 2013 if it adopts an
aggressive approach to reducing the ?600 million payment-in-kind (PIK) loan
due 2017 issued by immediate parent EB Holdings (not rated).
We recognize that the unsecured PIK debt is structurally and contractually
subordinated to all of Eco-Bat's debt, and that it does not involve any
guarantee or direct payment obligation on the company. However, EB Holdings
has no cash flow of its own, and we have no visibility on the ultimate
parent's strategy and capabilities with respect to injecting cash into EB
Holdings. We therefore assume that Eco-Bat will adopt a dividend policy that
keeps the outstanding (estimated) ?782 million PIK debt below ?1 billion. We
view Eco-Bat's redemption of 25% of its 2013 notes as a positive signal,
reducing the company's expensive debt. We believe that the company will likely
redeem more debt using its ?155 million cash in hand, and pursue a modest
dividend policy that leaves sufficient resources to repay the remaining notes
in 2013, without the need to refinance.
In the 12 months ended Sept. 30, 2010, Eco-Bat's adjusted debt to EBITDA was
4.2x and FFO to debt was 21%. We believe these ratios will weaken slightly in
2011--debt to EBIDTA to 4.7x and FFO to debt to 15%--but remain commensurate
with the current rating.
"The stable outlook reflects our opinion that Eco-Bat will be able to preserve
its niche market position while benefiting from modest growth, enabling it to
generate margins and cash flow in line with historical levels," said Mr.
Jelasko. Moreover, the outlook reflects our assumption that the company will
adopt an approach that balances its liquidity needs with those of its parent
company, EB Holdings."
We could consider a negative rating action if Eco-Bat's free operating cash
flow were to turn negative on a sustained basis, or on evidence of an
aggressive financial policy, either in the form of significant dividend
payouts or a refinancing of existing bonds with new bonds that have looser
restrictions. Over the longer term, if the company fails to address the
repayment of the PIK loan, as reflected by adjusted FFO to debt of below 10%,
the rating could also come under pressure.
Our limited visibility on the ultimate shareholder's view regarding the PIK
loan is a key constraint on the rating, limiting upside potential in the
medium term, even under the scenario where Eco-Bat has positive net debt.
