OREANDA-NEWS. Fitch Ratings has affirmed ABB Ltd's (ABB) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'A-' and Short-term IDR at 'F2'. The Outlook is Stable. Fitch has also upgraded Thomas Betts Corporation's USD250m senior unsecured notes due in 2021 to 'A-' from 'BBB+' to align this rating with ABB's senior unsecured rating.

The rating actions reflect Fitch's view that ABB's business and financial profile is commensurate with a 'A-' rating and can accommodate the weakening in its end markets and geographies. Fitch believes that funds from operations (FFO) adjusted gross leverage will remain below 3x and the FFO margin will continue to be above 9% in its forecast period despite lower profitability margins and revenue growth in 2016. Fitch's assumptions do not include any material M&A until ABB's restructuring is completed.

KEY RATING DRIVERS
End Markets under Pressure
ABB's short-term performance continues to be affected by its large exposure to oil & gas and mining markets and its above average exposure to emerging markets (EM). ABB's revenues declined by 13% (2% adjusted for FX on a year-on-year basis) in 3Q15 and base orders declined 3% year on year, suggesting further weakening in 2016. Fitch forecasts subdued revenue growth until 2017, with a very modest improvement in EBITDA margin backed by continued cost-cutting measures and improvement in Power Systems margins. Fitch assumes EBITDA margins between 13%-14% in its forecast period, which are commensurate with the rating.

Leaner Group Structure
Fitch believes successful implementation of the restructuring programme, including USD1bn of potential cost savings and working capital improvement leading to USD2bn cash release could provide better manoeuvring abilities for ABB and increase efficiency in the long term. A possible exit from the Power Grids division, which will incorporate most of ABB's exposure to volatile utilities markets, could provide additional liquidity for investments into industries or infrastructure markets that have EBITDA margins close to 18%. However, as there are no clear plans set for the division yet, Fitch did not incorporate any spin-off in its assumptions.

Above Average EM Exposure
ABB has one of the highest exposures to EMs of Fitch-rated capital goods companies. This contribution has increased to close to 50% of total revenues from 42% in 2006. The slowdown in China, one of ABB's largest markets after the US, is putting more pressure on ABB's financial profile than previously anticipated, posting a 15% order decline in 3Q15. Despite favourable long-term growth trends in most EMs, Fitch expects weaker market conditions in China to continue negatively affecting pricing and revenue growth until 2017.

Diversified Business Profile
With revenues of nearly USD40bn in 2014, ABB is one of the largest rated European capital goods companies. ABB offers a wide range of power and automation products across a broad range of end-markets from energy and utilities, transportation and manufacturing to basic and building material sectors. Moreover, the group is globally diversified, with a presence in more than 100 counties. Coupled with its centralised organisation, this provides the group with scale advantages in sourcing and production and provides strong bargaining power over suppliers and customers.

Strong Liquidity
Liquidity remained healthy at 3Q15, supported by gross cash of USD4bn and an undrawn USD2bn revolving credit facility. Coupled with strong free cash flow (FCF; 2.3% of revenues) generation expected in 2016, ABB has sufficient liquidity to cover its short-term debt payments totalling USD1bn in 2016.

KEY ASSUMPTIONS
- Continued pressure from Chinese market and oil prices.
- Muted organic growth until 2017.
- Services revenues to continue increasing.
- Improved margins after 2017 supported by restructuring programmes and leaner company structure.

RATING SENSITIVITIES
Negative: Future developments that may result in negative rating action are
- FFO adjusted leverage above 3.0x.
- FFO margin below 8%.
- FCF margin below 2%.

Positive: Future developments that may result in positive rating action are
- FFO adjusted leverage below 2.0x.
- FFO margin above 10%.
- FCF margin above 4%.

FULL LIST OF RATING ACTIONS
The rating actions are as follows:
ABB Ltd
Long-term Issuer Default Rating: affirmed at 'A-'
Short-term Issuer Default Rating: affirmed at 'F2'
Senior unsecured debt: affirmed at 'A-'

ABB Finance (Australia) Pty Limited
Senior unsecured debt: affirmed at 'A-'

ABB Capital B.V.
Commercial paper programme: affirmed at 'F2'

ABB Finance (USA) Inc.
Senior unsecured debt: affirmed at 'A-'

ABB Finance B.V.
Senior unsecured debt: affirmed at 'A-'

ABB Financial Services AB
Commercial paper programme: affirmed at 'F2'

ABB Treasury Center (USA), Inc
Senior unsecured debt: affirmed at 'A-'
Commercial paper programme: affirmed at 'F2'

Thomas Betts Corporation
USD250m senior unsecured notes due in 2021 upgraded to 'A-'from 'BBB+'