Fitch Ratings has affirmed that Harsco Corporation's long term Issuer Default Rating at BBB+ and the short term IDR at F2. The rating outlook is revised to negative from stable.
The revision in outlook reflects the negative effect of continued weakness in Europe's economy on Harsco's Infrastructure segment and slowing global economic growth. In addition, free cash flows in 2012, per Fitch's definition, are likely to be negative due to cash restructuring charges and approximately USD 300 million in capital spending. FCF could be breakeven or slightly positive by year end if the European economy stabilizes and demand improves faster than anticipated at either the Harsco Infrastructure or Harsco Metals & Minerals businesses.
Further downward revisions in the ratings could occur if metrics weaken further because of business conditions declining or the company materially increasing its outstanding debt. Also, increased capital expenditures mainly to fund growth initiatives in the Harsco Metals and Minerals segment are putting pressure cash flow metrics. Another downturn in the economy could restrain Harsco's ability to fund its growth investments without issuing debt. Fitch anticipates the company will be able to partially offset any additional weakening in demand and capitalize on expected long term growth as a result of its continued initiatives for cost savings. However, if additional funds are needed, leverage would likely deteriorate further.
Harsco's total debt to EBITDA leverage ratio is expected by Fitch to remain near recent levels of 1.8 times, which is weak for its current rating. Fitch believes debt balances could increase slightly in the near term due to cash restructuring actions. However, there are risks that Harsco may issue more debt than anticipated to fund its discretionary spending.
Although demand remains weak in certain areas of Europe, Fitch believes the non residential construction market has reached the trough of the cycle in many other developed regions. Stabilization of rental rates and rental equipment utilization rates has occurred in recent quarters. The slow recovery of these rates from recent historical lows should restrain margin growth until the company begins to experience material improvement within the developed regions. The restructuring actions announced in December 2011 could help stabilize margins by year end in the Infrastructure segment, as market conditions remain uncertain.
Harsco has sufficient liquidity to fund anticipated near term spending. Harsco's liquidity position will be pressured until the company renews its bank facility, which matures in December 2012. Fitch expects the company to have a new agreement by the end of the first quarter. The company's liquidity at December 31st 2011 included USD 121 million of cash plus approximately USD 570 million under its revolver, offset by USD 55 million of short term debt.
The ratings incorporate Harsco's competitive position in markets served, geographic diversification, and manageable capital structure. In addition, the company's domestic pension plan was over 80% funded as of December 31st 2010.
Fitch has affirmed the following ratings:
Harsco Corporation
IDR at 'BBB+'
Senior unsecured credit facilities at 'BBB+'
Senior unsecured debt at 'BBB+'
Short term IDR at 'F2'
Commercial paper at 'F2'
The ratings affect approximately $909 million of debt outstanding at December 31st 2011.
