Fitch upgrades Tarkett Participation’s outlook to positive, affirming ratings
Investing.com -- Fitch Ratings has revised the outlook for Tarkett (EPA:TKTT) Participation to Positive from Stable, while affirming its Long-Term Issuer Default Rating (IDR) at ’B+’. The firm also confirmed Tarkett’s senior secured rating at ’BB-’ with a Recovery Rating of ’RR3’, following a proposed amendment and extension of its term loan B (TLB).
The positive revision is attributed to Tarkett’s recent resilient performance and continued deleveraging in 2024, despite subdued demand. Fitch also predicts that improving margins and stabilized profitability will enhance the leverage profile from 2025 to 2028. An additional debt from the amendment and extension is expected to be offset by increased profitability.
Fitch anticipates the EBITDA leverage to decrease to approximately 4.4x by the end of 2025, down from 4.9x at the end of 2024. This is due to an expected increase in profitability and margins from recent acquisitions, which will more than offset an additional EUR50 million debt from the amendment and extension.
Under the proposed amendment and extension, Tarkett’s term loans will increase by up to EUR50 million, reaching around EUR971 million, and about USD70 million. The maturity will be extended to 2031. The revolving credit facility (RCF) is expected to increase to EUR400 million from EUR350 million, with an extension to six months before the term loan’s maturity. The proceeds are likely to be used primarily to finance the announced squeeze out of minority shareholders in Tarkett S.A., a listed subsidiary of Tarkett Participation, for approximately EUR100 million.
Despite lower margins compared to peers, Tarkett’s EBITDA margin is expected to stabilize at just above 8% from 2025 to 2028. The company’s margins have been impacted by a less niche product mix, the lower-margin North America segment, and weak demand in Europe.
Fitch expects free cash flow (FCF) margins to stabilize at about 2% from 2025 to 2028, supported by increasing EBITDA, solid revenue growth, stable margins, and stabilized working capital requirement and capex.
Despite challenging demand for building products in 2025, Fitch anticipates a gradual recovery from the second half of the year. Tarkett’s strength in sport flooring, particularly in North America, is expected to counterbalance weak volumes in other segments.
Tarkett has a leading market position across several product segments and markets, and strong end-market diversification. The company is exposed to raw-material cost swings, notably of oil-based derivatives PVC, plasticisers and vinyl, and has a fairly long lag in passing on cost inflation to its customers.
Tarkett’s expected EBITDA gross leverage of 4.4x-4.9x in 2024-2025 is stronger than that of lower-rated peers Gerflor and Victoria.
Fitch’s key assumptions include mid-single-digit revenue growth in 2025 and low-single-digit annual growth from 2026 to 2028, a stable EBITDA margin at just above 8% from 2025 to 2028, and capex at around 2.7% of sales.
The recovery analysis assumes that Tarkett would be reorganised as a going concern in bankruptcy rather than liquidated, and a 10% administrative claim. The RCF is fully drawn in a post-restructuring scenario according to Fitch’s criteria. The factoring line is ranked super senior. The going-concern EBITDA estimate of EUR180 million reflects a sustainable, post-reorganisation EBITDA.
Fitch identified several factors that could lead to a negative rating action or downgrade, including an EBITDA margin below 6%, negative FCF, EBITDA gross leverage above 6x, and EBITDA interest coverage below 3x. Conversely, factors that could lead to a positive rating action or upgrade include an EBITDA margin above 8% on a sustained basis, FCF margins sustainably above 2% on a sustained basis, and EBITDA gross leverage below 4.5x on a sustained basis.
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