Hexcel Outlk to Neg; $925M Bnk Ln Rtd BB by S&P

7 August 1998

Hexcel Outlk to Neg; $925M Bnk Ln Rtd BB by S&P

    NEW YORK--Standard & Poor's CreditWire 8/7/98-- Standard & Poor's today revised its outlook on Hexcel Corp. to negative from stable.
    Standard & Poor's also affirmed its double-`B' corporate credit and single-`B'-plus subordinated debt ratings on the company.
    At the same time, Standard & Poor's assigned its double-`B' rating to Hexcel's $925 million senior credit facilities being arranged to fund the $453 million acquisition of certain assets and liabilities of Clark-Schwebel Inc. and to refinance Hexcel's existing $355 million bank credit facility, on which the double-`B' rating will be withdrawn.
    The outlook revision reflects weaker cash flow protection measures and the capital structure that would result from the proposed debt-financed purchase of Clark-Schwebel. In the near term, funds flow coverage of debt, debt to earnings before interest, taxes, depreciation, and amortization (EBITDA), and debt to capital are expected to be below 15%, 4.0 times (x)-4.5x, and about 75%, respectively, levels which are subpar for the rating.
    Hexcel's ratings are based on its substantial positions in cyclical and competitive industries, as well as the expectation that the firm's financial profile will be restored, with the above ratios improving to 20% to 25%, 2.5x to 3.0x, and 55% to 60%, respectively, in the intermediate term.
    The company is an integrated global leader in manufacturing lightweight, high performance composite materials and structures for the commercial aerospace, defense and space, general industrial, and recreation markets. The markets served are cyclical, but most of them have growth potential where the firm's materials offer significant performance and economic advantages over traditional materials. Following the combination with Clark-Schwebel, Hexcel's business mix will be more diversified and broadened through the addition of that company's complementary and leading niche position in high quality glass fibers (1997 sales of $240 million by U.S. wholly-owned operations and about $330 million by joint ventures).
    Those materials are used to make printed circuit boards for electronics and telecommunications equipment, such as computers, cellular telephones, television sets, and automotive components, which should grow at a moderate rate over the long-term. The Clark-Schwebel acquisition would also reduce Hexcel's dependence on the commercial aerospace market to about 50% from 65% of total sales.

    The $925 million credit facilities are comprised of the following:

-- $375 million revolver, maturing in six years from closing;
-- $400 million tranche A term loan, maturing in six years; and 
-- $150 million tranche B term loan, maturing in seven years.

    The above facilities are available to Hexcel (guaranteed by domestic subsidiaries) and up to $100 million to European subsidiaries (guaranteed by Hexcel) for multi-currency cash advances and letters of credit. The bank facilities are rated the same as the corporate credit rating and will be secured by perfected security interests in the 100% of the capital stock of domestic subsidiaries and 65% of foreign subsidiaries.
    This collateral should provide some measure of protection to lenders, who can expect to recover more than a typical unsecured creditor in the event of default or bankruptcy, based on Standard & Poor's simulated default scenario. However, it is not clear that a distressed enterprise value would be sufficient to cover the fully drawn loan facilities. A syndicate of lenders is led by Credit Suisse First Boston (as administrative agent and arranger) and Citibank N.A. (as documentation agent), with pricing tied to LIBOR or the base rate, and the financial performance measures.
    OUTLOOK: NEGATIVE
    The rating anticipates a material strengthening of Hexcel's financial profile over the next several years as acquisition debt is repaid. Weaker-than-expected earnings and/or further significant acquisitions could prevent that improvement, prompting a downgrade.
---CreditWire