Hunter Douglas Finance B.V. 'B' Rating Affirmed On Refinancing, Debt Paydown; Outlook Stable; New Debt Rated
- Custom window coverings manufacturer Hunter Douglas Finance B.V. is refinancing its capital structure with a proposed new $3.3 billion term loan B and €904 million term loan B, both due in 2032. The final amounts will be determined at transaction close. As part of the transaction, the company will pay down $200 million of its existing term loans using balance sheet cash.
- We believe the paydown will help offset anticipated margin pressure from persistently weak demand and continued growth investments in 2025.
- We affirmed our ‘B’ issuer credit rating on the company. We also assigned our ‘B’ issue rating and 3’ recovery rating to its proposed term loans, indicating our expectation of meaningful (50%-70%; rounded estimate: 55%) recovery in the event of default. We will withdraw the ratings on the company’s existing term loans once the transaction closes.
- The stable outlook reflects our expectation that Hunter Douglas will maintain S&P Global Ratings-adjusted leverage of approximately 6.2x over the next 12 months and continue to generate free operating cash flow (FOCF) of at least $200 million in the next 12 months, despite a weaker macroeconomic environment.
SAN FRANCISCO (S&P Global Ratings) Jan. 10, 2025--S&P Global Ratings today took the rating actions listed above.
We view the paydown as credit positive, offsetting leverage pressure from the challenging environment and recent growth investments. Year-to-date third-quarter revenue increased 1% from the prior-year period as strong growth in Hunter Douglas’ international segment (including its e-commerce and shop-at-home channels) helped offset persistent demand softness in the Americas and Europe. However, S&P Global Ratings-adjusted EBITDA margin has declined sequentially each quarter in 2024 to approximately 15% in the last 12 months ended Sept. 30, 2024, from almost 17% in the prior-year period. As a result, S&P Global Ratings-adjusted leverage remained high at 7.2x. We see the paydown reducing leverage to approximately 6.9x pro forma for the transaction.
Hunter Douglas continues to increase pricing to combat volume declines and higher material/labor costs as the windows covering market remains challenging. Although the company has made progress toward its cost-savings goal, it has not yet brought EBITDA to where we had expected for this fiscal year. Hunter Douglas reinvested cost savings to fund selling expenses for key businesses to support its strategic growth priorities. We expect the benefits of its recent growth investments to begin affecting 2025, improving margin to 16.2% and leverage approaching 6x by the end of the year. However, these levels remain under our previously forecasted margin improvement to 18%, underpinning our view that further near-term improvement will continue to depend on the company’s ability to both sustain top line growth and streamline costs. Additionally, we maintain a softer volume outlook for the next year as sluggish home sales and limited consumer discretionary spending on larger-ticket items persist, with near-term revenue growth from continued expansion in its international e-commerce business.
Hunter Douglas’ sizable liquidity and healthy cash flow generation offset the risk of despite high leverage somewhat in our view. The company maintained a cash balance of $783 million as of Sept. 30, pro forma for its $200 million debt paydown. This liquidity position is supported by free operating cash flow of about $250 million for the 12 months ended Sept. 30. Despite tough operating conditions, with higher input costs and interest burden, Hunter Douglas remains a good cash flow generator, as its products are mostly custom and made-to-order, which limits inventory and working capital requirements. However, we note that despite our healthy forecast for at least $200 million of FOCF each of the next two years, the inflationary climate and other factors have reduced that from $600 million when demand peaked in 2022.
We believe Hunter Douglas will continue to utilize excess cash to fund acquisitions, looking for opportunities to enter new channels and adjacent product categories. Additionally, such cash flow and liquidity will support its large debt service requirements and growth investment needs as the operating environment remains weak through 2025. The company also recently extended the maturity of its $800 million revolving credit facility to November 2028 from February 2027. We expect Hunter Douglas’ revolver usage to remain minimal; it has historically been undrawn at quarter-end.
The stable outlook reflects our expectation Hunter Douglas will maintain leverage approaching 6x and continue to generate FOCF of at least $200 million over the next 12 months, despite a weaker macroeconomic environment.
We could lower our ratings if Hunter Douglas sustains leverage above 7x and FOCF materially contracts. This could occur if:
- The macroeconomic environment continues to worsen and consumer discretionary household spending on furnishings, including window coverings, declines further from our base expectations;
- The company cannot effectively manage input cost pressures from either its inability to pass those on to customers or to manage its operations to offset cost increases;
- It incurs sizable cash costs to achieve its cost-saving targets but fails to achieve them; and
- Its financial policy becomes more aggressive and it undertakes debt-funded acquisitions or shareholder returns above our expectations.
While unlikely within the next 12 months, we could raise our ratings if Hunter Douglas sustains leverage below 5x or we favorably reassess its competitive position. This could occur if the company:
- Expands EBITDA following successful realization of expected synergies and lower costs as inflationary pressures on fuel and labor subside, and demand recovers alongside consumer discretionary spending; or
- Continues to prioritize utilizing cash flow for debt reduction instead of acquisitions or shareholder returns.
Related Criteria
- Criteria | Corporates | General: Sector-Specific Corporate Methodology, April 4, 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: Methodology: Industry Risk, Nov. 19, 2013
- General Criteria: Country Risk Assessment Methodology And Assumptions, 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 Contact: | Waylan Yee, San Francisco 1-212-438-0246; waylan.yee@spglobal.com |
| Secondary Contact: | Diya G Iyer, New York 1-212-438-4001; diya.iyer@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.