OREANDA-NEWS. Fitch Ratings believes Cummins Inc.'s (CMI) financial flexibility mitigates concerns about possible debt funded acquisitions, although there is an increased risk that such transactions could occur. CMI stated during a meeting with investors yesterday that it could allow leverage to increase in the event of material acquisitions, including an increase in debt/EBITDA to a range of 1.5x-2.0x, or possibly higher in certain instances. This is above the 1.25x level that Fitch previously indicated could trigger a negative rating action, and well above the company's historical leverage, including debt/EBITDA of 0.6x and FFO adjusted leverage of 1.2x as of Sept. 27, 2015. The Issuer Default Rating of 'A' assigned by Fitch incorporates flexibility for a modest increase in leverage, including debt/EBITDA slightly above 1x and FCF/total adjusted debt near 20% compared to levels above 20% historically.

Fitch could take a negative rating action if credit metrics are weak for a sustained period of 1-2 years without clear plans by CMI to return them to stronger levels. This could occur if mid-cycle debt/EBITDA is above 1.25x or FCF/Total Adjusted Debt declines to the mid-teens.

Fitch interprets CMI's willingness to consider debt-funded acquisitions and higher leverage as providing flexibility to make acquisitions, and that the company intends to maintain strong credit metrics over the long term at levels consistent with an 'A' rating. Fitch believes CMI would use future free cash flow to reduce debt or could adjust its cash deployment to free up funds, including, if necessary, a temporary reduction to its long term plan to return 50% of operating cash flow to shareholders.

Rating concerns include weak business cycles in several of CMI's markets including power generation and off-road equipment and key regions such as China and Brazil. As a result, there is a risk that a large debt-funded acquisition during a cyclical downturn could make it difficult for CMI to rebuild credit metrics at a pace that would support its current ratings. In addition, a large acquisition would involve integration risk.

These concerns are mitigated by CMI's competitive positions in its engine and power generation markets, technological capabilities, global distribution network, and strong operating cash flow.