Fitch Affirms SPX Corporation at 'BB '; Outlook Stable
Fitch has also upgraded the ratings of SPXC's senior secured credit facilities to 'BBB-' from 'BB+' and assigned a Recovery Rating of 'RR1' to the senior secured credit facilities, per Fitch's 'Recovery Ratings and Notching Criteria for Non-Financial Corporates issuers' (dated Nov. 18, 2014).
The Rating Outlook is Stable. The ratings cover \\$400 million of senior secured short and long term borrowings. Additionally, Fitch has withdrawn ratings on \\$600 million of senior unsecured notes due 2017. The notes were assumed by Flow, which is not rated by Fitch.
KEY RATING DRIVERS
Fitch's rating actions reflect SPXC's post spin-off capital structure, SPXC management's commitment to conservative financial policies, and Fitch's expectation that SPXC will generate positive free cash flow and maintain adequate financial flexibility.
Fitch expects SPXC's debt/EBITDA will decline to approximately 2.7x (as defined by Fitch) by the end of 2016 from 3.4x at the end of 2015. The decrease in leverage will be driven by a slight increase in operating margins, the announced plans to repay \\$50 million short-term borrowings and scheduled amortization of the company's term loans.
SPXC and Flow will indemnify each other for liabilities arising from performance guarantees prior to the spin-off of Flow. In addition, both companies have entered into several agreements including tax matters, transaction services and employee matters. Fitch does not anticipate that SPX will incur material liabilities from the separation.
Fitch's rating concerns include an anticipated reduction in product and end market diversification, increased exposure to highly cyclical end markets, and significant underperformance and continued exposure to two major contracts in South Africa under which SPXC supplies critical components to 12 800 megawatt coal-fired plants. Fitch's other concerns include SPXC's historical willingness to maintain higher leverage than its stated leverage range for a prolonged period of time and its future cash deployment strategy which has recently focused on share repurchases and acquisitions. Additionally, Fitch is cautious regarding post spin-off SPXC's overall business strategy and growth opportunities as the company has primarily focused on growing its Flow Technology segment over the past decade.
SPXC will retain all qualified U.S., Canadian, and UK pension plans including the participation in a multiemployer benefit plan assumed in connection with the ClydeUnion acquisition in 2011. Even though SPXC and Flow will maintain separate sponsorship of the non-U.S. benefit plans sponsored by respective company as of Sept. 26, 2015, Fitch assumes SPXC will retain all of the \\$202 million underfunded pension liabilities.
As of Dec. 31, 2014, SPX's U.S. pension plans were approximately 67% funded with pension benefit obligation (PBO) of \\$455 million (\\$150 million underfunded). The company's foreign pension plans are 78% funded with PBO of \\$240 million (\\$53 million underfunded). SPXC expects to contribute \\$16 million to its pension plans in 2015. Contributions to the multiemployer benefit plan are immaterial.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for SPXC include:
--Low single digit revenue annual decline through 2017 with a moderate rebound in 2018;
--EBITDA margins in the range of 6.5% to 7.5% compared to 8.7% in 2014;
--The company has suspended share repurchases and dividends during 2015. Fitch assumes the company will resume share repurchases and dividends at approximately \\$50 million annually beginning 2017;
--The company will generate a post dividend FCF margin at approximately 3%;
--Capital expenditures will remain steady at 1.3% of revenues annually;
--Debt will decline by the end of 2016 driven by the repayment of the short-term borrowings and scheduled amortization of the term loan;
--The company will not make acquisitions;
--Pension contributions will not be a material cash flow item in the foreseeable future.
RATING SENSITIVITIES
Fitch may consider a negative rating action if debt / EBITDA does not decline below 3.0x during 2016 or FFO adjusted leverage remains above 4.0x as a result of weak operating results or debt-funded acquisitions or share repurchases. Additionally, Fitch may consider a negative rating action if the company does not repay its short-term borrowings by fiscal 2016 or if the Medupi and Kusile projects in SPXC's Power segment result in significant unexpected losses.
Fitch views a positive rating action as unlikely in the near term due to concerns related to recent revenue pressures in the company's various end markets and weaker than anticipated operating results. A positive rating action will be contingent upon the company defining its cash deployment strategy and resolving exposure to the Medupi and Kusile projects in South Africa.
LIQUIDITY
Fitch expects the company's liquidity will be adequate for the ratings. SPXC has entered into a new five-year \\$1.2 billion senior secured credit agreement comprised of a \\$350 million revolver, \\$350 million Term Loan A, and \\$300 million participation and \\$200 million bilateral Foreign Credit Instrument Facilities (for performance letters and guarantees). SPXC anticipated having approximately \\$350 million liquidity consisting of \\$50 million in cash and \\$300 million availability under its \\$350 million revolving credit facility immediately following the spin-off on Sept. 26, 2015. Fitch expects the company's liquidity will remain in the range of \\$350 million to \\$500 million over the next several years.
FULL LIST OF RATING ACTIONS
Fitch has taken the following rating actions for SPXC:
--IDR affirmed at 'BB+';
--Senior secured facilities assigned 'RR1' Recovery Ratings';
--Senior secured facilities upgraded to 'BBB-/RR1' from 'BB+';
--Senior unsecured notes rating withdrawn.
The Rating Outlook is Stable.
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