OREANDA-NEWS. S&P Global Ratings said today that it has affirmed all of its ratings on Downers Grove, Ill.-based Dover Corp. and removed them from CreditWatch, where we placed them with negative implications on June 9, 2016. The outlook is negative.

"The affirmation reflects that, despite the recent challenges in the company's energy and fluids segments and its decision to undertake a mainly debt-funded acquisition of Wayne Fueling Systems for $780 million, we expect that Dover's credit quality will improve to levels that are more appropriate for the current rating during the next two years," said S&P Global credit analyst James Siahaan. The company has taken steps to restructure its energy operations and is on track to achieve over $100 million of savings in 2016. While the additional borrowing for the Wayne Fueling acquisition could cause the company's credit measures to deteriorate during the quarters immediately following the deal's completion, Dover's adjusted debt-to-EBITDA metric will eventually improve to around 2.5x and its solid free operating cash flow of more than $825 million will likely remain above 20% of its debt. We expect management to abide by disciplined financial policies over the near-term to support our existing ratings. Our forecast assumes that Dover will reduce its debt leverage during the next two years through earnings growth and by using internally generated cash flow, along with the proceeds from divestitures, to intermittently pay down some of its debt.

The negative outlook on Dover reflects that there is a one-in-three possibility that we will lower our ratings on the company during the next two years if weak operating conditions, unexpected integration issues, or aggressive financial policies cause its credit measures to deteriorate.

We could lower our ratings on Dover if the improvement in its credit measures stagnates or deteriorates. In particular, the risk of a downgrade would be heightened if the company's adjusted debt-to-EBITDA metric and free operating cash flow-to-debt ratio approach 3x and 15%, respectively. This could occur if the economy weakens and the company's operating profits decline while its debt levels remain unchanged. We could also lower the ratings if management deviates from our expectations regarding its financial policies and decides to undertake debt-funded share repurchases or acquisitions that would materially increase the company's net debt.

We could revise our outlook on Dover to stable if the company's portfolio management, productivity initiatives, and discipline regarding its capital structure strengthen its credit ratios to levels that are more appropriate for the current rating (such as an adjusted debt-to-EBITDA metric of 2.5x or lower and a free operating cash flow-to-debt ratio of consistently above 20%). The company could achieve this if a significant rebound in its energy and industrial markets and contributions from its acquisitions increase its total revenue to more than $7.5 billion by mid-2018 while its adjusted EBITDA margins increase by 100 basis points. Although less likely during the next two years, we could also consider raising our ratings on Dover if the company's operating performance and financial policies support meaningfully stronger credit measures, such as an adjusted debt-to-EBITDA metric of consistently below 2x and a free operating cash flow-to-adjusted debt ratio of more than 25%.