Hexcel bonds seen trading in high yield post Friday downgrade by S&P Global

Some senior unsecured bonds backing Hexcel Corp. are trading off high yield desks this morning after S&P Global Ratings cut the company’s credit to speculative grade.

Traders reported activity in Hexcel's $300 million of 4.7% notes due 2025, which were two points higher in early trading, at 111.375. The bonds hit a pandemic-era high just above 113 before the Jan. 5 downgrade. The bonds dipped below 103 on May 12. Hexcel also has $400 million of 2027 bonds, which were quoted at 108 from their post-slump high of 110.25 on Jan. 4.

Hexcel in January amended its senior unsecured revolver to reduce commitments to $750 million, from $1 billion, and to lift a maximum leverage ratio covenant that applied through March 31, 2022. The company instead must maintain a liquidity level of at least $250 million during this period and is subject to limitations on share repurchases, cash dividends and its ability to incur secured debt.

Ratings cut Hexcel and its unsecured debt to BB+, from BBB-, and assigned the notes a recovery rating of 3 on rounded estimates of a 50% recovery in the event of a default. The agency cited weak margins and diminishing orders as the company's commercial aerospace customers use their existing inventory to preserve cash. That client base represents about 55% of revenue for Hexcel, which develops, manufactures and markets materials used in commercial aerospace, space and defense, and industrial markets.

The drop in new orders compounds the effect of a broad reduction in aircraft build rates among original equipment manufacturers such as Boeing Co. and Airbus SE and led Ratings to maintain a negative outlook on Hexcel as it believes that destocking will continue into the second quarter of 2021. The agency also sees volumes in Hexcel"s industrial business, including wind energy, remaining depressed because of the drop in spending.

Ratings now expects Hexcel's funds from operations to debt to be in the 14%-18% range and its debt to EBITDA to be in the 4.4x-4.8x range in 2021 before improving to 20%-24% and 3.4x-3.8x, respectively, in 2022.

Moody"s has Hexcel credit on the lowest rung of its investment-grade ratings scale, at Baa3.