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26. August 2009: Fitch Downgrades Pfleiderer to ‘B’; Remains on Watch Negative

Fitch Ratings-London/Milan-26 August 2009: Fitch Ratings has today downgraded Pfleiderer AG’s (Pfleiderer) Longterm Issuer Default Rating (IDR) to ‘B’ from ‘BB-‘. The agency has also downgraded Pfleiderer’s EUR275m undated subordinated fixed- to floating-rate capital securities to ‘CCC’ from ‘B’. The Recovery Rating on the capital securities is RR6. Both ratings remain on Rating Watch Negative (RWN). The company’s Short-term IDR is affirmed at ‘B’.

The downgrade reflects a further deterioration in Pfleiderer’s operational performance during Q209 and continued uncertainty over demand for its products. As a result, Fitch has revised downwards its financial forecasts for Pfleiderer and expects the issuer’s financial profile to deteriorate further within the next 12-18 months. Fitch anticipates that the company’s net lease adjusted debt (including 75% equity credit on the hybrid bond)/EBITDAR will potentially exceed 6.0x during this period, compared to 3.5x for FYE08. The agency expects depressed demand from Pfleiderer’s major end-markets and pricing pressure to persist during the remainder of 2009 and 2010. These factors will likely be exacerbated by structural overcapacity in the engineered wood industry. While Pfleiderer expects slightly improving market conditions in North America, rising competitive pressure in eastern Europe and sluggish demand in western Europe are putting pressure on volumes and prices.

Pfleiderer’s industry environment worsened in Q209 compared to Q109 and Q208. Its Q209 EBITDA margin was 7.9%, compared with a reported EBITDA margin of 14.7% in Q109 and 13.2% in Q208. At the same time, reported net financial debt (unadjusted for off-balance sheet debt and excluding the hybrid bond) increased to EUR797.5m at end- June 2009 from EUR715.8m at FYE08. As a result, Pfleiderer was in breach of financial covenants (calculated as net debt/LTM EBITDA less than 3.5x) under its EUR452m syndicated loan, the EUR165m promissory note (Schuldscheindarlehen) and a EUR46m bilateral facility at the test date at end-June 2009. It has so far obtained waivers for financial liabilities amounting to EUR513m. In addition Pfleiderer highlighted a potential breach of financial covenants for credit facilities amounting to EUR172m at eastern European subsidiaries going forward. Pfleiderer is negotiating with its banks and lenders as it seeks to achieve a viable restructuring of existing debt. Management is also considering potential government support in the form of a loan from the state-owned Kreditanstalt fuer Wiederaufbau. Fitch expects that any restructuring will result in materially higher interest costs, which would put additional pressure on cash generation and limit the company’s ability to start significant deleveraging any time soon.

The RWN reflects Fitch’s concerns regarding the outcome of ongoing negotiations on major parts of Pfleiderer’s financing structure with the group’s banks and lenders of the promissory note. The agency expects to resolve the RWN following the closing of the restructuring package presently under discussion, and following an assessment of its terms and conditions. The company is expecting to conclude restructuring negotiations by end-Q309/beginning Q409. In addition, Fitch will also look at the measures Pfleiderer will undertake in the more challenging economic environment to sustain operating performance and mitigate the expected deterioration in credit metrics. Material delays in the restructuring process or increased negative pressure on operations performance could place further negative pressure on its ratings.

Fitch considers the issuer’s current liquidity to be weak. At end-Q209, Pfleiderer reported EUR62.39m in cash and undrawn committed facilities in excess of EUR100m. This compares to short-term financial liabilities of EUR672.7m, of which EUR359m have been classified as current as a result of the covenant breaches.

Pfleiderer’s ratings continue to be supported, however, by its business profile as a leading producer of engineered wood, with growing shares in its key markets. They also reflect its sound geographical diversification, with strong positions in its core markets in western and eastern Europe and North America, and its broad, integrated product range. The ratings are constrained by the industry’s capital intensity and vulnerability to cyclical supply-demand imbalances, resulting in price pressure, and by the company’s challenged ability to pass on raw material price increases to customers.

Pfleiderer is a leading supplier of engineered wood, surface-finished products and laminate flooring. With some 5,700 employees and production sites in western and eastern Europe and North America, the group reported sales of EUR1.7bn in FY08 and EBITDA of EUR223.7m.