Matthews International rating downgraded to ’B+’ by S&P Global Ratings

Investing.com -- S&P Global Ratings has lowered the credit rating of Pittsburgh-based Matthews International Corp. (NASDAQ:MATW) to ’B+’ from ’BB-’ following the completion of its SGK business divestiture. The rating agency also changed the company’s outlook to negative, citing elevated metrics.

Matthews International closed its SGK business divestiture to a joint venture with competitor SGS (SIX:SGSN) & Co. for a total consideration of $250 million in cash, $50 million in trade receivables, $50 million of preferred equity, and a 40% common equity interest in the venture.

The company is expected to use most of the net cash proceeds to repay debt. However, the S&P Global Ratings-adjusted debt to EBITDA ratio will likely remain unchanged at the high end of the 4x-5x range for 2025. This is due to a projected decrease in EBITDA of approximately $60 million related to the divestiture, weak operating results, and a moderate increase in share repurchases.

The remaining businesses of Matthews International, primarily memorialization and industrial, are seen as less diversified and more volatile. This is especially true given the underperformance and uncertainty in the industrial technologies business.

The lower rating reflects the fact that the divestiture of SGK will result in a substantially smaller and less diversified business with similar credit metrics. Post-divestiture, Matthews International has approximately 30% less revenue and EBITDA.

The memorialization business, which accounts for 80% of overall EBITDA, is viewed as a stable business. However, Matthews International is expected to continue to invest in riskier businesses to drive growth. The company recently announced a larger memorialization acquisition, purchasing The Dodge Company, a supplier of embalming chemicals, for $57 million.

Despite a decrease in S&P Global Ratings-adjusted debt of over $200 million after the divestiture, Matthews International’s leverage will remain in the high-4x area due to the decrease in EBITDA of approximately $60 million. Cash flow deficits are also expected to continue after the approximately $30 million dividend and share repurchases.

The negative outlook primarily reflects elevated leverage and uncertainties about deleveraging. The company’s S&P Global Ratings-adjusted pro forma debt to EBITDA is expected to be nearly 5x in 2025. Both the memorialization and industrial technologies segments are experiencing a slowdown in sales, adding to the uncertainty.

The potential for incremental acquisitions, share repurchases, and cash costs adds further uncertainty to future debt balances. All assets are under consideration as part of the company’s strategic review, leading to further uncertainty about the composition of the go-forward business and capital structure.

S&P Global Ratings could consider a lower rating if Matthews International’s adjusted debt to EBITDA remains above 5x or if the free cash flow is sustained below 5% of debt. On the other hand, the outlook could be revised to stable if EBITDA improves and operating results trend positively in line with market trends, leading to a comfortable debt to EBITDA ratio of 4x-5x.

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