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Investing.com -- Fitch Ratings has revised the Rating Outlook for AZZ Inc (NYSE:AZZ). from Stable to Positive, while affirming the Long-Term Issuer Default Rating (IDR) at ’BB’. The company’s first-lien senior secured term loan and RCF have also been affirmed at ’BBB-’ with a Recovery Rating of ’RR1’.
The revised outlook is reflective of AZZ’s leading position in the market for hot-dip galvanizing and coil coating solutions, its low exposure to commodity prices, commitment to reducing debt, and flexible cost structure. Fitch has also taken into account the company’s exposure to cyclical end-markets.
On May 1, 2025, Avail Infrastructure Solutions, a joint venture of AZZ and Fernweh Group LLC, finalized the sale of its electrical enclosures, switchgear, and bus systems businesses to nVent Electric (NYSE:NVT) plc. The Positive Outlook takes into account the potential for AZZ to significantly reduce its debt using its share of the sale proceeds.
The Outlook could be revised to Stable if Fitch believes EBITDA leverage will be sustained between 2.5x and 3.5x. Fitch expects AZZ to use a significant portion of its share of the Avail sale proceeds to accelerate debt paydown, resulting in leverage comfortably within the company’s net leverage target range of 1.5x-2.5x.
Fitch expects the new aluminum coil coating facility to start generating positive FCF in the near term. AZZ has reported that its remaining capital expenditure of about $8 million will be spent by May 31, 2025. The facility, which has started to ship product, has a long-term contract for 75% of capacity. AZZ expects this project to generate annual run-rate sales of approximately $60 million in the fiscal year ending Feb. 28, 2027.
AZZ benefits from its strong position in niche markets and proximity to a diverse customer base. The company is a leader in independent hot-dip galvanizing and metal coil coating solutions, with market shares of 28% and 23% respectively.
The company’s cost structure is approximately 75% variable, reducing earnings downside from weak operating environments. AZZ serves a range of end-markets, including the highly cyclical construction, transportation, and industrial markets, as well as the less cyclical consumer and utilities markets.
Fitch expects AZZ’s management to pursue small, opportunistic bolt-on merger and acquisitions (M&A), while maintaining balance sheet strength. The company has also resumed share repurchases under its $100 million share repurchase program, with about $53 million remaining.
AZZ’s current EBITDA leverage is higher than ’BB’ peers but lower than Kaiser Aluminum (NASDAQ:KALU). Fitch expects AZZ to continue reducing debt. Key assumptions include secured overnight financing rate assumptions, revenue growth of about 3% per year on average, EBITDA margins stable at about 21%, and debt repayment prioritized in FY 26.
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