• We expect DCG Acquisition Corp. (doing business as Dubois Chemicals) to post higher leverage than we previously anticipated due to continued raw material inflation and destocking issues for the remainder of 2023.
  • Therefore, we revised the outlook to negative from stable. We affirmed the 'B-' issuer credit rating.
  • We also affirmed the 'B-' issue-level rating and '3' (rounded estimate: 55%) recovery rating on the company's first-lien secured term loan.
  • At the same time, we affirmed the 'CCC' issue-level rating and '6' (rounded estimate: 0%) recovery rating on the company's second-lien secured term loan.
  • The negative outlook on Dubois reflects our view that leverage will remain above our previous expectations, and there is now less cushion than before at the current rating, making the company more vulnerable to potential continuing weakness in demand.

The outlook revision follows below-average operating results in the fourth quarter of 2022 and the first quarter of 2023 and our expectations for elevated leverage in 2023.

High raw material costs and customer destocking continue to affect the company. We now anticipate leverage will remain elevated for the rating over the next year. Specifically, we project S&P Global Adjusted debt to EBITDA of 7.5x-8.5x over the next 12 months. DuBois was able to offset the headwinds from inflation and elevated raw material costs via price increases and cost-saving initiatives across its portfolio. However, we expect continuing supply chain issues and softer demand in its oil and gas and vehicle washing end markets to hamper its profitability and margins throughout the year.

Despite weaker-than-expected earnings, we anticipate Dubois will generate positive free cash flow this year.

Dubois has been able to generate positive free cash flow during the first half of 2023 by liquidating excess inventory and improving working capital. Moreover, the company was able to pay down about $28 million on its $90 million revolving credit facility in the first quarter of 2023. We expect overall demand for the back half of 2023 to remain somewhat resilient as raw material availability continues to normalize and costs begin to come back down. Even though we anticipate demand will begin recovering and costs will moderate, we still expect 2023 credit metrics to remain soft.

We continue to assess DuBois' business risk as weak.

The company derives almost all its revenue and earnings from North America and maintains small market shares in its end markets. Furthermore, in certain markets, it competes with larger, financially stronger companies that may view those spaces as less attractive in terms of profitability, entry barriers, or market size. These companies could provide significant competition in the longer term if DuBois' niche markets become more attractive. The company's strong customer diversity partially offset these risk factors. We view DuBois' EBITDA margins as average relative to those of its specialty chemicals direct peers and supported by its track record of achieving its targeted synergies from tuck-in acquisitions.

Over the past few years, the company has grown its share in the niche middle-market space via small tuck-in acquisitions and cross-selling to its customer base. We believe DuBois will continue focusing on growth through tuck-in acquisitions, innovation, and new product introductions.

The negative outlook on Dubois reflects our expectation that its credit metrics will remain weak over the next 12 months. The company should continue to experience somewhat steady demand in the rest of 2023, with slight improvement expected in 2024 as the global economy recovers in key end markets, supporting improved credit metrics and liquidity. In our base case, we expect modest organic revenue growth in 2023 bolstered by moderate M&A activity and slightly better economic conditions. We expect margins will remain relatively weak for the rest of the year, but we expect modest improvement in 2024 as the company begins to benefit from synergies achieved from acquisitions, price increases, and cost savings. We expect the company to remain highly leveraged, with weighted-average debt to EBITDA in the 7.5x-8.5x range. We do not anticipate significant refinancing risk as the company's nearest maturity is in 2026.

We could lower the rating over the next 12 months if DuBois experiences weaker-than-expected recovery in its end markets due to continued demand weakness, high raw material prices, and destocking, resulting in higher total pro forma leverage such that debt to EBITDA approaches the double-digit area on a sustained basis. We could also consider a downgrade if we believe liquidity sources uses materially weakens to less than 1.2x or, against our current expectations, if the company completes a large debt-funded acquisition or dividend recapitalization.

We could revise the outlook to stable within the next 12 months if the company's operating performance is stronger than we expect, such that pro forma debt leverage remains below 7.5x on a sustained basis by improving EBITDA margins 200 basis points beyond our expectations. This could happen if we see a stronger-than-expected macroeconomic recovery and DuBois grows through a mix of more profitable end markets and demand growth of higher-margin products from acquisitions. We would also need clarity that the company's financial policies would support credit measures at these levels, after factoring in its growth initiatives.

DuBois provides consumable value-added specialty chemical solutions and services for manufacturing, industrial processing, food processing, cleaning and sanitizing, water treatment, consumer car wash, and fleet transportation markets.

•Low-single-digit percent organic revenue growth in 2023 supplemented with bolt-on acquisitions;
•S&P Global Ratings'-adjusted EBITDA margin in the mid-to high-teens percent range due to a combination of increased raw material costs and supply chain issues;
•U.S. GDP expands by 1.7% in 2023 and 1.3% in 2024;
•U.S. light-vehicle sales of 14.7 million units in 2023, rising to 15.7 million units in 2024;
•Capital spending of $12 million-$17 million annually; and
•The company continues to pursue tuck-in acquisitions, although we do not factor in any transformational acquisitions in our forecast.

We assess DuBois' liquidity as adequate. We believe the company's sources of liquidity will be more than 1.2x uses over the next 12 months. We also project its net liquidity sources will remain positive even if its EBITDA drops 15%.

Principal liquidity sources

•Moderate cash balance;
•Full availability under the revolver; and
•FFO of $40 million-$60 million annually.

Principal liquidity uses

•$7 million in debt amortization annually;
•
Modest working capital outflows; and
•

$12 million-$17 million in capital spending annually.

The company has a springing maximum first-lien net leverage ratio of 7.75x, which is triggered when it draws on more than 35% of the revolver's commitment If the company drew on more than 35% of the revolver, we believe it would maintain a sufficient cushion under the covenant. We believe DCG will remain in compliance with its covenants over the next 12 months.

Environmental factors have no material influence on our rating analysis on DuBois, which produces mainly specialty chemicals. Although, the chemical sector in general faces scrutiny from regulators and consumers, we believe that the lower asset intensity of DuBois' specialty chemical production, relative to most commodity chemical production, contributes in many instances to a relatively lower potential for environmental issues including waste and pollution. Social factors have a neutral impact on our rating analysis and remain on par with the broader industry. We view financial sponsor-owned companies with aggressive or highly leveraged financial risk profiles as demonstrating corporate decision-making that prioritizes the interests of their controlling owners, which typically have finite holding periods and focus on maximizing shareholder returns.

•Our rating on the company's senior secured first-lien credit facilities is 'B-' and our recovery rating is '3', indicating our expectation for meaningful (50%-70%; rounded estimate: 55%) recovery in the event of a payment default.
•Our rating on the company's second-lien term loan is 'CCC' and our recovery rating is '6', indicating our expectation for negligible (0%-10%; rounded estimate: 0%) recovery.
•We have valued DuBois on a going-concern basis using a 5.5x multiple of projected emergence EBITDA, which is in line with the multiples we use for other specialty chemical companies, such as Innovative Chemical Products Group.
•We estimate $100 million of emergence-level EBITDA, assuming DuBois would recoup some of the lost revenue and regain profitability during the bankruptcy process.
•Our simulated default scenario contemplates a default occurring in 2025 in the wake of a severe and protracted economic recession, resulting in significantly depressed levels of industrial manufacturing spending and a downturn in the industrial manufacturing industry. Additionally, if bigger, more capitalized peers take customers from DuBois, it could significantly hurt the company's operating performance.

•Simulated year of default: 2025
•EBITDA at emergence: $100 million
•EBITDA multiple: 5.5x

•Net enterprise value (after 5% administrative costs): $522 million
•Collateral value available to first-lien creditors: $522 million
•Estimated first-lien secured term loan claims: $889 million
•Recovery expectations for first-lien secured credit facilities: 50%-70% (rounded estimate: 55%)
•Total value available to second-lien claims: $0
•Estimated second-lien secured term loan claims: $153 million
•Recovery expectations for second-lien secured credit facilities: 0%-10% (rounded estimate: 0%)

Note: All debt amounts include six months of prepetition interest.