OREANDA-NEWS. S&P Global Ratings today assigned its 'BB' corporate credit rating to Versum Materials Inc. The outlook is stable.

At the same time, based on preliminary terms and conditions, we assigned our 'BB+' issue-level and '2' recovery ratings to Versum's proposed $775 million senior secured credit facilities, consisting of a $200 million revolving credit facility and a $575 million term loan B. The '2' recovery rating indicates our expectation of substantial (upper half of the 70% to 90% range) recovery in the event of a payment default. We also assigned our 'BB-' issue-level and '5' recovery ratings to the proposed $425 million senior unsecured notes. The '5' recovery rating indicates our expectation for modest (upper half of the 10% to 30% range) recovery in the event of a payment default.

"The ratings on Versum reflect our assessments of the company's business risk profile as fair and financial risk profile as significant," said S&P Global Ratings credit analyst Brian Garcia.

Versum maintains solid market positions in the niche markets it serves. We believe the company should benefit from growth in demand for semiconductors, driven by demand for increased data and smartphone usage. As a result, we expect the company's EBITDA to gradually increase over the next one to two years. Given our expectations for modestly improving earnings and prudent debt leverage to fund growth initiatives, we expect weighted-average funds from operations (FFO) to debt to remain in the 20% to 30% range.

The stable outlook reflects our belief that Versum's EBITDA will gradually increase, driven by growth in its higher-margin materials segment. We believe the company should benefit from growth in demand for semiconductors, driven by demand for increased data and smartphone usage. Gradually increasing fiscal 2017 EBITDA should result in modestly improving credit measures, including weighted average FFO to debt between 20% and 30%, pro forma for acquisitions. We also expect management to show prudence in funding growth and shareholder rewards.

We could lower the ratings within the next 12 months if lower-than-expected demand in the semiconductor industry or the loss of a key customer resulted in lower-than-expected EBITDA and credit measures. We could also lower the ratings if the company experiences issues in operating as a stand-alone company or if the transition is more costly than currently expected. Our downside scenario could result if EBITDA margins were at least 200 basis points (bps) lower than we currently project in our base-case scenario, combined with minimal revenue growth. In this scenario, we would expect weighted-average FFO to debt to decline below 20% (pro forma for acquisitions) without near-term prospects for improvement. We could also lower the ratings if, against our expectations, cash outlays or financial policy decisions stretch the company's financial profile beyond a level appropriate for the current ratings.

Although we view an upgrade as unlikely over the next 12 months, we could raise the ratings if growth in the company's materials segment is stronger than we currently project, combined with significantly stronger EBITDA margins than we currently project in our base case scenario. This could result if EBITDA margins are 500 bps higher than our fiscal 2017 projections, combined with double-digit-revenue growth, as a result of greater demand in the semiconductor industry, as well as greater-than-expected cost reductions. In this scenario, we would expect weighted-average FFO to debt increasing to above 30% on a sustainable basis, pro forma for acquisitions. This could also result if the company is able to generate significantly more free cash flow than we currently expect and uses it for debt reduction, resulting in strengthening credit measures.