Fitch Affirms SPX's IDR at 'BB+'; Outlook Negative
Fitch Ratings has affirmed SPX Corporation's (SPW) Issuer Default Rating (IDR) and senior secured credit facilities at 'BB+'. The Rating Outlook is Negative. The ratings cover approximately $2.1 billion of outstanding debt. A full list of ratings follows at the end of this release.
SPW's leverage (debt to EBITDA) is high for ratings driven by a significant decline of EBITDA in 2012 due to unexpected challenges associated with ClydeUnion's integration, lower product demand due to downturns in European and global economic markets, and a divestiture of the Service Solutions business completed in Dec. 2012. Fitch anticipates SPW will significantly reduce its indebtedness during the fourth quarter of 2012 prepaying $325 million term loans maturing in 2013 and retiring some short term debt. Despite the anticipated debt reduction, Fitch estimates SPW's leverage will be approximately 3.9x at the end of 2012, unchanged from the previous year.
SPW's high leverage is Fitch's primary rating concern. The company's de-levering process is significantly slower than Fitch's expectations immediately following ClydeUnion's acquisition. Fitch will closely monitor SPW's leverage in 2013. Fitch's expects SPW's leverage will decline to approximately 2.7x, as measured by Fitch, by the end of 2014 driven by a full integration of ClydeUnion business which should improve ClydeUnion's lower than expected margins. SPW may be able to significantly reduce its leverage by the end of 2013 by pursuing a large cash funded acquisition or retiring additional debt. Fitch does not expect SPW to deploy cash in a form of a special dividend or engage in share repurchases in addition to the already announced plan to repurchase $275 million worth of outstanding shares.
SPW has good financial flexibility in the near term due to a significant increase in liquidity which is expected to be more than $1.3 billion by the year-end. The company has a $1.8 billion committed senior secured revolving credit facility that expires in June 2016. The bank facilities include a $300 million domestic revolver, a $300 million global multicurrency revolver, a $1.0 billion foreign credit instrument facility and a $200.0 million bi-lateral foreign credit instrument facility. SPX had $799 million in LOCs outstanding as of Sept. 30, 2012. Other sources of debt financing include up to $130.0 million under a trade receivables financing agreement.
In addition to strong liquidity, Fitch expects SPW to maintain gross debt/EBITDA within its targeted range between 1.5x and 2.5x (as defined in the company's bank credit agreement); anticipated improvements in operating results in 2013; solid, albeit declining operating margins; historically positive free cash flow (FCF); good product and geographic diversification; management's track record in successfully integrating acquisitions; large installed base which drives revenues from the higher margin aftermarket business; and sizable backlog.
The senior unsecured notes are rated one-notch below senior secured facilities due to their subordinated position to the latter, which increased significantly with the higher leverage of the company.
The company has a history of generating relatively strong operating margins, though they have been declining over the past several years. In 2011 the company reported 9.5% EBITDA margin compared to 10.1% in 2010. SPW's margin was 8.6% for the last twelve months (LTM) ended Sept. 30, 2012. Fitch expects SPW's 2012 EBITDA margin to be lower than that of 2011, however expects them to it gradually improve beginning 2013. Fitch expects SPW to generate above $420 million EBITDA (as defined by Fitch) in 2012.
Even though SPW historically generates positive FCF, Fitch expects the company to report negative FCF in 2012 driven by lower operating cash flows due to decline in sales, margin pressures and pension contributions; significantly higher interest expenses; and a large investment in net working capital for ClydeUnion acquisition. In 2013, Fitch expects SPW's FCF to be higher than $200 million driven by improved operating results.
Fitch's Negative Outlook reflects concerns regarding SPW's high leverage; anticipated negative FCF in 2012; and steady decline in margins beginning in 2010. The concern about margins is partly offset by Fitch's expectation that margins will improve in 2013 due to stronger backlog and improvements in operations. Fitch's other concerns include continued weakness in the global economy; SPW's significant exposure to Europe; cash deployment strategies which focus on acquisitions; and underfunded pension and unfunded other postretirement benefit (OPEB) liabilities, which may increase at the year-end due to prevailing low interest rate environment.
SPW mainly utilizes its cash for acquisitions, capital expenditures, dividends and occasional share repurchases, thought the company had not repurchased shares in 2010 and 2011. On Feb. 16, 2012, SPW announced a plan to repurchase up to $350 million worth of shares by Feb. 14, 2013, in accordance with a share repurchase program authorized by our Board of Directors. As of Dec. 3, 2012 the company has already repurchased $75 million worth of shares and plans to repurchase additional $275 million. Fitch is concerned with this significant share repurchase program given SPW's high leverage for the ratings. Fitch will closely monitor SPW's future cash deployment strategies, however, it does not expect additional share repurchases to be a large part of cash deployment in the near future.
SPW's domestic pension plans are $325 million underfunded (73% funded), however approximately $166 of the underfunded position relates to the plans which are not required to be funded. Total pension obligations totaled $1,478.2 million the end of 2011. Fitch does not view the funded status of SPW's pension liabilities to be a significant credit risk and does not expect the discretionary contributions to qualified pension plans to be a significant part of cash deployment. SPW expects to make approximately $46.8 million contributions to qualified domestic pension plans. The company did not make pension contributions in 2011 as it contributed approximately $120.0 million to its pension plans in 2010, including approximately $100 million of discretionary payments. During the first nine months of 2012, SPW contributed approximately $39.0 million to its foreign and qualified domestic pension plans. The underfunded status of all plans increased to $363 at the end of 2011 from $311 million at the end of 2010, largely due to the decline in discount rates and low return on assets.
Future Rating Actions:
The Rating Outlook could be revised to Stable if SPW is able to reduce leverage to its long-term target range within 12 - 18 months pending the deployment of its large cash balances. Fitch may consider a negative rating action if:
--The company continues experiencing margin pressures and slower product demand in Europe and emerging markets.
--Leverage remains high for a prolonged period of time or decreases slower than anticipated.
--There is an unexpected cash deployment towards shareholders in form of a special dividend or additional share repurchases.
Fitch has affirmed the following ratings:
--IDR at 'BB+';
--Senior secured bank facilities at 'BB+';
--Senior unsecured debt at 'BB'.
Rating Outlook is Negative.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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