Madison Safety & Flow Holdings IV LLC Assigned 'B' Issuer Credit Rating, Outlook Stable; New Term Loan Rated
Rating Action Overview
- Madison Safety & Flow Holdings IV LLC (Madison Safety), a manufacturer of safety and flow equipment, is conducting a dividend recapitalization under which it will use the proceeds from a proposed $980 million term loan--along with $33 million of balance sheet cash--to fund a $600 million distribution to its parent, repay $397 million of existing debt, and pay about $15 million of transaction fees and expenses.
- The company benefits from its exposure to stable end-markets, a sizeable recurring revenue stream, and high switching costs for its end users, and these positive factors are tempered by its relatively small scale and limited product diversification.
- We expect modest deleveraging over the next 12 months, with S&P Global Ratings-adjusted debt to EBITDA declining to the low-6x area from about 6.5x as of the close of the transaction. We also expect the company will maintain good interest coverage and free cash flow metrics, with S&P Global Ratings-adjusted EBITDA interest coverage in the low-2x area and S&P Global Ratings-adjusted free operating cash flow (FOCF) to debt in the mid-single-digit percent area.
- Consequently, we assigned our 'B' issuer credit rating to Madison Safety and our 'B' issue-level rating and '3' recovery rating to its term loan. The '3' recovery rating indicates our expectation for meaningful (50%-70%; rounded estimate: 50%) recovery in the event of a default.
- The stable outlook reflects our expectation that the company's leverage will decline below 6.5x and remain at that level over the next 12 months, inclusive of potential moderate debt-funded acquisitions and modest discretionary dividend distributions.
ENGLEWOOD (S&P Global Ratings) Sept. 12, 2024—S&P Global Ratings today took the rating actions listed above.
Madison Safety benefits from its exposure to stable end markets, a sizeable recurring revenue stream, and high switching costs for its key product lines. The company serves several end markets that exhibit stable demand and are benefiting from secular megatrends. The demand in the fire and emergency medical services (EMS) end market (45% of revenue for the 12 months ended June 30, 2024) largely driven by municipal budget allocations to this key public service, which we believe will continue to steadily rise. The smart grid and sustainable energy (16%) and water and natural resources (12%) end markets are supported by ongoing infrastructure investment. Madison Safety derives 87% of its revenue from recurring sources linked to the replacement demand from its large installed base. Lastly, a large portion of the company's products are used in lifesaving and personnel safety applications, with its end-users requiring rigorous training on its equipment, which results in high switching costs. Madison Safety's competitive advantages are reflected in its profitability, with S&P Global Ratings-adjusted EBITDA margins of about 29% in 2023, which are well above those of many other manufacturers in the capital goods sector.
However, our assessment of the business is tempered by its small scale and limited diversification relative to its capital goods peers. In 2023, Madison Safety generated revenue of $493 million, which reflects its relatively small scale compared with its rated peers. In addition, we view the company's diversification as limited in terms of its product scope and geographic exposure. Although Madison Safety sells a variety of products, the scope of its offerings is focused on the fragmented markets for rescue tools, safety, security, and metering and its products are used in highly targeted applications. The company's geographic exposure is also somewhat more concentrated than that of its rated peers, with North America representing about 74% of revenue in 2023. Madison Safety's regional focus in several product lines entails greater potential risk of market disruption from the entry of an international player.
Over the next 12 months, we expect modest deleveraging primarily driven by earnings growth, with S&P Adj. debt-to-EBITDA declining to the low-6x area (from about 6.5x at transaction close). We expect Madison Safety will expand its organic revenue by the mid-single-digit percent area over the next 12 months, supported by increased volumes and continued price increases. We believe the company's improving operating leverage on higher volumes will support a modest increase in its S&P Global Ratings-adjusted EBITDA margins to about 30%. Overall, we expect Madison Safety's S&P Global Ratings-adjusted debt to EBITDA will decline to 6.4x as of year-end 2024 and 6.0x as of year-end 2025 from about 6.5x as of the close of the transaction. The company typically requires relatively low annual working capital and capital expenditure (capex) investment, and we expect it will generate solid FOCF of over $50 million annually.
Madison Safety is majority owned by Madison Industries, and our expectation of financial policy could constrain upside to our rating. Madison Industries is a privately held company that owns and operates a portfolio of businesses, and we believe its ownership of Madison Safety could lead to decision-making that prioritizes equity holders over other stakeholders. Specifically, we believe that Madison Safety could conduct periodic discretionary dividend distributions to its parent to support return-of-capital or potential re-allocation of capital across its portfolio of businesses. Our base-case forecast assumes modest annual discretionary distributions from Madison Safety to Madison Industries, in addition to any distributions related to taxes. Nevertheless, we believe Madison Safety's FOCF generation is sufficient to support these capital return distributions along with its required debt amortization obligations.
The stable outlook on Madison Safety reflects our expectation that the company's leverage will decline to below 6.5x and remain thereat that level over the next 12 months, inclusive of potential moderate debt-funded acquisitions and modest discretionary dividend distributions.
We could lower our ratings on Madison Safety if we expect its credit metrics will deteriorate, for example, due to a large debt-funded acquisition or dividend distribution, a pressured operating performance stemming from a weak economic environment, or strained cash flow. Specifically, we could lower our ratings if we expect:
- Leverage will increase to above 6.5x and remain at that level;
- EBITDA-interest coverage will decline below 1.5x; or
- FOCF will be consistently negative.
Although unlikely over the next 12 months, we could raise our ratings on Madison Safety if it continues to demonstrate a solid operating performance and margin profile while employing a more-conservative financial policy such that:
- Leverage declines below 5x and remains at that level;
- EBITDA-interest coverage remains above 2x; and
- FOCF to debt remains above 5%.
Management and governance factors are a moderately negative consideration in our credit rating analysis of Madison Safety because of its ownership by controlling owner Madison Industries. We believe the corporate decision making of controlling owners prioritizes their interests over those of other stakeholders. Environmental and social factors have no material influence on our credit rating analysis of Madison Safety.
Related Criteria
- Criteria | Corporates | General: Sector-Specific Corporate Methodology, April 4, 2024
- Criteria | Corporates | General: Methodology: Management And Governance Credit Factors For Corporate Entities, Jan. 7, 2024
- Criteria | Corporates | General: Corporate Methodology, Jan. 7, 2024
- General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
- General Criteria: Group Rating Methodology, July 1, 2019
- Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
- Criteria | Corporates | General: Recovery Rating Criteria For Speculative-Grade Corporate Issuers, Dec. 7, 2016
- Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
- General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
- General Criteria: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.spglobal.com/ratings for further information. Complete ratings information is available to RatingsDirect subscribers at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.spglobal.com/ratings.
European Endorsement Status
Global-scale credit rating(s) issued by S&P Global Ratings' affiliates based in the following jurisdictions [To read more, visit Endorsement of Credit Ratings] have been endorsed into the EU and/or the UK in accordance with the relevant CRA regulations. Note: Endorsements for U.S. Public Finance global-scale credit ratings are done per request. To review the endorsement status by credit rating, visit the spglobal.com/ratings website and search for the rated entity.
| Primary Credit Analyst: | Dipak Chaudhari, CFA, Englewood +1 (303) 204-9280; dipak.chaudhari@spglobal.com |
| Secondary Contact: | Svetlana Olsha, CFA, New York + 1 (212) 438 1467; svetlana.olsha@spglobal.com |
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