OREANDA-NEWS. February 25, 2016.  Fitch Ratings has assigned a rating of 'A' to Hubbell Incorporated's proposed \\$300 million issuance of 10-year senior unsecured notes. Proceeds from the issuance will be used to repay commercial paper and for general corporate purposes. Fitch currently rates Hubbell's Long- and Short-Term Issuer Default Ratings (IDRs) at 'A'/'F1'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS
The rating reflects Hubbell's solid operating performance over the long term, balanced against recently softer results and more aggressive financial policies. Hubbell's sales grew 0.9% in 2015 following 5.5% growth in 2014, driven by 4.3% growth in the power segment, supported by acquisitions, offsetting a 0.4% decline in the electrical segment.

Fitch expects soft sales growth again in 2016, as current strength in both residential and non-residential construction markets, as well as a stable utility market, will continue to offset significant weakness in harsh and hazardous markets and a general slowdown in industrial. Longer term, Fitch expects low single-digit organic revenue growth, augmented by acquisitions, as construction lighting markets will benefit from retrofit demand, an aging utility infrastructure will drive power segment demand, and as oil and gas and industrial markets stabilize and return to a growth mode.

Hubbell's EBIT margin before restructuring charges narrowed by 35 basis points to 15.6% in 2015 as weakness in the electrical segment offset margin expansion in the power segment. Fitch believes that margins could narrow further in 2016, but remain in the 15% to 16% range longer term. The company will continue its model of acquiring smaller competitors that typically come with lower profit margins and using Hubbell's footprint and distribution network to drive productivity.

Fitch expects free cash flow (FCF) after dividends will remain near \\$200 million annually, and that Hubbell will use this FCF, together with incremental borrowings, for acquisitions and share repurchases. A reclassification of Hubbell's shares completed in December 2015 triggered a \\$200 million payment to the 'A' shareholders. In addition, the company plans to complete up to \\$250 million of share repurchases in 2016.
Proceeds from the note issuance will provide the funding necessary to complete the repurchases and ongoing acquisitions, and could push debt/EBITDA to around 1.5x - 1.6x at the end of 2016 from 1.0x as of the end of 2015. In addition, FCF/adjusted debt is expected to move into the high teens from 22% in 2015 while EBITDA/interest declines to below 17x from 20x.

These credit measures are at the weak end of Fitch's sensitivities for the 'A' rating, leaving little headroom for further operating weakness or additional debt-financed acquisitions. Fitch expects Hubbell's credit metrics will gradually improve beyond 2016 as growth in EBITDA outpaces growth in debt levels.

The ratings are supported by Hubbell's:

--Meaningful end-market, product and customer diversification contributing to operating stability;
--Significant exposure to long-cycle businesses, particularly for construction markets, which constitute around 45% of total net sales, and enhance top-line visibility;
--Solid operating model underpinned by acquiring smaller players within fragmented markets and leveraging Hubbell's footprint and distribution network to drive profitability growth.

Ratings concerns center on Hubbell's:

--Increased shareholder returns which Fitch believes could result in less conservative financial policies over the longer term;
--Small scale for the rating on a revenue and cash flow basis;
--Low organic growth prospects, given focus on mature end-markets and exposure to the U.S.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Hubbell include:

--Sales growth of around 2% in 2016, driven primarily by acquisitions;
--Slight EBIT margin deterioration in 2016 due to continue pressure on industrial and oil and gas markets, offset in part by savings from the company's restructuring;
--\\$200 million of FCF after dividends, which together with incremental borrowings will finance \\$250 million of share repurchases and acquisitions of at least \\$170 million;
--Debt/EBITDA increases to around 1.5x - 1.6x at end-2016 from 1.0x at end-2015

RATING SENSITIVITIES
Negative rating actions could result from Fitch's expectations for:

--Total leverage sustained above 1.5x, driven by increased borrowings to support share repurchases and slowing profitability growth; or
--Annual free cash flow (FCF) below \\$200 million from lower than anticipated sales growth and profitability.

Fitch does not expect positive rating action in the absence of meaningfully higher revenues and FCF.

LIQUIDITY
Fitch believes Hubbell's liquidity was sufficient at Dec. 31, 2015, and consisted of:

--\\$356 million of cash and cash equivalents, the bulk of which was held outside the U.S.;
--An undrawn and fully available \\$750 million revolving credit facility expiring in 2020, which serves as a backstop to Hubbell's commercial paper (CP) program.

Fitch's expectation of FCF after dividends of around \\$200 million also supports liquidity.

FULL LIST OF RATING ACTIONS

Fitch currently rates Hubbell as follows, with a Stable Outlook:

--IDR at 'A';
--Senior unsecured credit facilities at 'A';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1';
--Commercial paper at 'F1'.