OREANDA-NEWS. S&P Global Ratings said today that it has revised its outlook on Darien, Ill.-based Viskase Cos. Inc. to negative from stable and affirmed all of its ratings on the company.

At the same time, we revised our recovery rating on the company's first-lien secured term loan to '4' from '3'. The '4' recovery rating reflects our expectation for average recovery (30%-50%; upper half of the range) in the event of a payment default.

"The outlook revision reflects our belief that the market dynamics driving the demand for Viskase's small-diameter cellulosic casings have weakened and that, despite some growth in the demand for the company's fibrous and plastic casings, its credit measures could remain pressured for the remainder of 2016 and into 2017," said S&P Global credit analyst James Siahaan. The company's adjusted debt-to-EBITDA ratio, which was 6.6x as of June 30, 2016, may rise above 7x during the course of the next year, which is a level that we view as barely acceptable for the current rating. Viskase estimates that the volume of hot dogs consumed in the U. S. has declined by 8% over the past year (roughly 30% of the company's sales come from the U. S.). In addition, the growth of the company's business in Asia (9% of its sales) has stalled because of competition from lower-priced collagen products and the general economic downturn in the region. Furthermore, adverse currency movements have also hurt Viskase's performance because the company's foreign competitors, which base their production outside the U. S., have created a more competitive price environment for dollar-transacted sales globally. Viskase's revenue contracted by 8% (only a 6% drop when you exclude the impact of foreign-exchange headwinds) for the first six months of 2016 while its trailing 12 month adjusted EBITDA margins contracted by 350 basis points compared with the same period last year. The company benefitted from a series of cost-reduction initiatives during the past few years, which helped lift its margins to the 18%-19% range through 2014 and most of 2015, though the challenges that it currently faces have proved considerable. Operational initiatives, such as the company's ongoing focus on reducing its manufacturing footprint, lowering its raw material costs, and improving its productivity, could help stabilize its margins somewhat. However, absent a rebound in the demand for small diameter cellulosic casings and an improvement in relative currency rates, the conditions in Viskase's industry may remain challenged.

The negative outlook on Viskase reflects our expectation that the company's challenging operating conditions could cause its adjusted debt-to-EBITDA to increase above 7x and that there is a one-in-three chance that we will lower our ratings.

We could lower our ratings on Viskase if it becomes apparent that the company will be unable to maintain an adjusted debt-to-EBITDA metric of less than 7x during the next year. We could also lower our ratings if the weakness in the company's operating environment persists and its liquidity weakens. Specifically, if the company's EBITDA-to-interest coverage deteriorates to roughly 2x, we could lower our ratings.

We view an upgrade as highly unlikely due to Viskase's stretched credit measures and its ownership by a financial sponsor, which may force the company to employ aggressive financial policies or undergo a re-leveraging transaction. For us to consider an upgrade, we would need a clear indication that the company's future financial policies will support improved credit metrics. In addition, we would expect its adjusted debt-to-EBITDA to improve to about 3.5x and remain there consistently through a business cycle.