Lyle Stafford
For a moment there, it looked like Armtec was in the process of getting its act together. From January to July the shares shot 70 per cent higher, and in the summer the company announced it met the required covenants on its credit facility from Brookfield Financial.
But it's been all downhill from there. From their peak, the shares have plummeted nearly 50 per cent. On Thursday, rating agency Standard & Poor's dealt the industrial product manufacturer another blow by downgrading its long-term credit rating to B-.
On top of that, S&P cut its rating on Armtec's $150-million in senior unsecured notes to CCC from B-, and said the chances of recovery for these notes is now just 0 to 10 per cent, following Armtec's decision to accrue interest on its 12 per cent credit line from Brookfield.
Although Armtec trumpeted its success for achieving the Brookfield covenants that required senior debt to amount to less than 5 times earnings before interest, taxes, depreciation and amortization, S&P believes the company's adjusted debt to EBITDA will be above 7 times and funds from operations will be below 10 per cent "for at least the next few years."
"The downgrade also reflects our belief that the company has limited ability to absorb either a slowdown in end-market demand or operational missteps," S&P noted. "This is an important consideration, particularly in light of management's recent assessment that demand for the company's products and solutions is softening slightly and our belief that these risks are interrelated; in the past, slowing demand has caused firms (including Armtec) to bid at margins that leave them little room for error or to pursue work outside of their core competencies."
It's not as if Armtec's revenues and EBTIDA have fallen off a cliff this year. The problem is that both lines of the income statement aren't growing at nearly the rate necessary to dig Armtec out of its debt hole.
Tim Kiladze