Investing.com -- Commercial Vehicle Group (NASDAQ:CVGI) Inc.'s rating has been lowered to 'B-' from 'B' by S&P Global Ratings, due to increased leverage and negative cash flows. The downgrade reflects an unexpected weakness in commercial vehicle markets and operational challenges that have significantly affected CVG's financial position. The company's liquidity was weaker than expected in 2024, with the possibility of more pressure emerging in 2025. The main cause of the downturn is weaker than anticipated demand from commercial vehicle customers.
CVG saw a significant decrease in revenue and earnings in 2024, resulting in a large Free Operating Cash Flow (FOCF) deficit and reduced available cash and credit availability. S&P Global Ratings expects this trend to continue into 2025, with additional strain likely on its liquidity position unless market conditions rebound, which is not expected until the second half of 2025.
CVG has exited from businesses it considered non-core as part of its restructuring plan. It completed the sale of several businesses in 2024, including FinishTek, cab structures, First Source Electronics, and a production facility. The gross proceeds from these sales totaled between $45 million to $50 million, a portion of which was used for debt repayment.
Following these divestitures, S&P Global Ratings now predicts CVG's adjusted debt-to-EBITDA ratio to be around 6x in 2024, which is not in line with the previous rating. The company's liquidity is expected to be constrained in 2025, with negative reported FOCF in 2024 and a forecast of FOCF between breakeven and negative $5 million in 2025.
The company's maximum leverage covenant is at risk of being breached in 2025. S&P Global Ratings suggests that the company may need to seek alternative sources of liquidity to avoid or cure a covenant breach, though this is not included in their base-case assumptions.
CVG amended its credit agreement in December 2024 to avoid breaching the maximum leverage covenant due to weaker demand across the business and near-term restructuring charges. The company's first-lien term loan was reduced to $85 million through repayment, offset by a draw on its revolving credit facility, which was reduced to $125 million.
S&P Global Ratings expects the company's EBITDA margin to contract nearly 400 basis points to the low-4% area in 2024, largely due to weaker demand and restructuring charges. The EBITDA margin is forecasted to improve 100-200 basis points in 2025, largely as restructuring charges incurred in 2024 roll off, foreign exchange headwinds subside, and business mix improves.
CVG's financial risk profile has worsened to aggressive from significant, according to S&P Global Ratings. The negative outlook reflects the risk that the rating could be further lowered over the next 12 months if CVG's liquidity significantly deteriorates or if the capital structure becomes unsustainable.
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