Fitch Rates Harsco Corporation's New Credit Facilities 'BB+/RR1'

Fitch Ratings has assigned an expected rating of 'BB+/RR1' to Harsco Corporation's (Harsco) planned $550 million, seven-year senior secured term loan B facility. Fitch has also affirmed its rating of 'BB+/RR1' on Harsco's senior secured revolver, which is expected to be upsized from $350 million to $400 million with a five-year maturity.

In addition, Fitch has affirmed Harsco's Long-Term Issuer Default Rating (IDR) at 'BB' and its senior unsecured notes at 'BB/RR4'. The Rating Outlook is Stable.

A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The new credit facilities will strengthen Harsco's balance sheet by extending debt maturities and eliminating refinancing risk relating to its senior unsecured notes. The proceeds from the new $550 million term loan together with borrowings on the revolver will be used to repay the company's existing term loan A, of which $159 million was outstanding as of Sept. 30, 2016, and its $450 million of 5.75% senior unsecured notes that mature in May 2018.

The collateral backing the facilities includes the capital stock of each direct subsidiary (65% of stock of first-tier foreign subsidiaries) and substantially all of the company's domestic tangible and intangible assets. In addition, all of the company's domestic, wholly owned restricted subsidiaries guarantee the facilities.

Fitch revised Harsco's Rating Outlook to Stable from Negative in September 2016 following the company's announcement that it has sold its 26% interest in Brand Energy & Infrastructure Services, Inc. (Brand) for net proceeds of $145 million, with the proceeds to be used for debt reduction. Harsco had $676 million of debt outstanding as of Sept. 30, 2016.

The Stable Outlook reflects recent debt reduction with the proceeds from the sale of the company's interest in Brand and from FCF, which has turned positive in 2016. Fitch expects Harsco will continue to control costs and maintain a disciplined cash deployment strategy, evidenced by its suspension of its dividend and commitment to reduce financial leverage.

The Rating Outlook also reflects Fitch's expectation that Harsco's results will not weaken materially from current levels as a result of ongoing restructuring efforts in the metals and minerals (M&M) segment, offsetting ongoing weakness in the rail and industrial segments. Fitch recognizes the continuing uncertainty surrounding Harsco's long-term operating strategy and the risk that weakness in its end-markets may be protracted.

The M&M segment (64% of 2015 revenues) reported a 17% revenue decline in the first half of 2016, due primarily to site exits, but higher operating earnings as a result of restructuring actions. While business conditions remain weak, earnings from this segment are beginning to show signs of stabilization.

Sales in the industrial segment (21% of sales) declined 33% in the first half of 2016 and margins contracted by more than 500bps due to sharply lower demand for heat exchangers used in natural gas processing. At the same time, the rail segment (15% of sales) experienced a 15% sales decline and sharply lower margins in the first half reflecting weak rail markets in North America. In addition, the company took a $40 million charge in the half for anticipated losses on two contracts with the Swiss National Railway.

FCF has turned positive as a result of the suspension of the dividend, which saves $66 million annually, and a reduction in capex. Fitch expects FCF after dividends will be in the $70 to 80 million range in 2016 compared with negative $72 million in 2015 and that this cash flow will be used for debt reduction. Fitch expects Harsco will maintain positive FCF going forward. In addition, sale of the stake in the Brand joint venture (JV) will save Harsco $22 million in optional annual payments to its partner in the JV and save $8 million in annual pension payments.

Fitch expects debt/EBITDA will improve from 3.3x at mid-2016 to below 3x at the end of 2016 due to the repayment of around $200 million of debt from the Brand sale proceeds and FCF, offsetting lower EBITDA. Fitch expects the company will maintain leverage at below 3x going forward.

Harsco announced in November 2015 that it is exploring strategic options for a separation of its metals and minerals (M&M) segment. Fitch expects that a separation of the metals and mining business will take some time, having been slowed by weak market conditions, and that it likely won't occur in the near term. Fitch expects the ultimate rating outcome for Harsco following a separation would be in the 'BB' range depending on the proceeds received and the extent to which they are used for debt reduction.

KEY ASSUMPTIONS

--Sales decline by around 16% in 2016, due to weakness in all three segments;

--The EBITDA margin recovers to around 17.5% from 16.3% in 2015, supported by the company's restructuring activities;

--Debt levels are reduced by around $200 million with the Brand sale proceeds and FCF;

--FCF improves to $70 to 80 million due to the suspension of the dividend;

--Debt/EBITDA improves to below 3x from 3.2x at the end of 2015.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a negative rating action include the following:

--Fitch's expectation that debt/EBITDA will remain above 3x to 3.5x and FFO adjusted leverage remain above 4x to 4.5x;

--FCF turns negative on a sustained basis;

--Separation of the M&M business, given the resulting reduced scale and diversification.

The ratings are unlikely to be upgraded in the medium term. Longer-term, developments that may, individually or collectively, lead to a positive rating action include:

--The company either retains the M&M business or the remaining business develops into a larger, more diversified operation;

--Stronger FCF generation;

--Debt/EBITDA is sustained under 2.5x, and FFO adjusted leverage under 3.5x.

LIQUIDITY

Harsco's liquidity at Sept. 30, 2016 is supported by cash of $79.9 million, the bulk of which was held overseas but could be remitted to the U.S. with minimal tax implications. Liquidity is further supported by a $350 million secured revolver, on which $154.5 million was available. Liquidity is also supported by FCF, which Fitch expects will turn positive in 2016.

The planned transaction will increase the revolver capacity to $400 million and will eliminate the refinancing risk related to the $449 million of unsecured notes that mature on May 15, 2018.

FULL LIST OF RATING ACTIONS

Fitch has assigned an expected rating of 'BB+/RR1' to Harsco's planned $550 million, seven-year senior secured term loan B facility.

Fitch affirms Harsco Corporation's ratings as follows:

--Long-Term IDR at 'BB';

--Senior secured RCF at 'BB+/RR1';

--Senior secured term loan A at 'BB+/RR1';

--Senior unsecured debt at 'BB/RR4'.

The Rating Outlook is Stable.

Date of Relevant Rating Committee: Oct. 21, 2016

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available at www.fitchratings.com.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/site/re/879564

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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1013534

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https://www.fitchratings.com/regulatory

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