OREANDA-NEWS. Fitch Ratings has affirmed and withdrawn the Issuer Default Ratings (IDR) for SPX Corporation (SPXC) at 'BB+' and the ratings of SPXC's senior secured credit facilities at 'BBB-/RR1'. The Rating Outlook is revised to Negative from Stable. The ratings cover $350 million of senior secured long-term borrowings.

Fitch has chosen to withdraw the ratings for SPXC for commercial reasons.

KEY RATING DRIVERS
The main drivers of the Negative Outlook are the risks associated with SPXC's exposure to large projects; continued exposure to the Kusile project, which has contributed to recent charges; operating challenges, margin pressures, and the overall challenging macro-environment affecting the Power segment; the company's still-evolving operating strategy, and concerns about future cash deployment. Even though SPXC has taken numerous steps to de-risk its exposure to the large South African projects in the second half of 2015, it will continue to be exposed to the project throughout 2016. Recent margin pressures in the Power segment weakened the company's credit metrics in 2015 and Fitch expects credit metrics will remain weak for the ratings until mid-2017.

Fitch does not expect SPXC to use its cash to repay its term loans earlier than the current amortization schedule. We expect the company will deploy the majority of its excess cash towards strategic bolt-on acquisitions or for share repurchases, which could resume in 2016.

Fitch projects the company's financial metrics will be adequate for the current ratings by the end of 2017; however, there are still concerns as to execution risks of the South African project, completing the project's redefined scope in 2016, and the company's ability to address underperformance in the Power Generation sector of its Power segment. In 2015, the company reported 1.1% Power-segment income margin, down from 4% in 2014. Fitch expects the margin will improve to the historical level by 2017; however, the prolonged underperformance in this largest segment may further pressure the company's credit metrics.

Fitch's expects that SPXC's leverage will be approximately 2.86x (as defined by Fitch) at the end of 2017, down from approximately 4.26x at the end of 2016 (Fitch's 2016 leverage includes estimates for financial results of the South African projects). The decrease in leverage will be driven by a slight increase in operating margins, and scheduled amortization of the company's term loans.

Other rating concerns include an anticipated reduction in product and end-market diversification, increased exposure to highly cyclical end markets, and recent underperformance in the company's Power segment. SPXC has historically shown a willingness to maintain higher leverage than its stated leverage range for a prolonged period of time and to deploy cash for share repurchases and acquisitions. Additionally, Fitch is cautious regarding post spin-off SPXC's overall business strategy. On Feb. 25, 2016, the company announced plans to optimize capital utilization to assess strategic alternatives for portions of the power generation business that do not meet SPXC's return expectations.

Fitch's ratings reflect SPXC's capital structure, management's commitment to conservative financial policies, which includes a publically stated gross leverage (debt/EBITDA) target in the range of approximately 1.5x to 2.5x, expected positive free cash flow (FCF) generation, and adequate financial flexibility. Fitch notes that SPXC's leverage targets are based on EBITDA as defined in its bank agreement and the ratio is therefore understated when compared to Fitch's calculation.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for SPXC include:
--Low single-digit revenue annual decline through 2017 with a moderate rebound in 2018;
--Steady EBITDA margins in the range of 6.5% to 7.5% beginning 2017;
--Dividend payments remain suspended through the rating period and the company renews its share repurchases in 2016;
--The company generates approximately 4% FCF margin annually beginning 2017;
--Capital expenditures remain steady in the range of 1.1% to 1.3% of revenues;
--Debt will decline slightly with the repayment of scheduled amortization the term loan;
--The company makes no acquisitions;
--Pension contributions will not be a material cash flow item in the foreseeable future.

RATING SENSITIVITIES
Rating sensitivities are no longer relevant given today's rating withdrawal.

LIQUIDITY
Fitch expects the company's liquidity will be adequate for the ratings. In 2015, SPXC entered into a new five-year $1.2 billion senior secured credit agreement consisting of a $350 million revolving credit facility (RCF), $350 million Term Loan A, and $300 million participation, and $200 million bilateral Foreign Credit Instrument Facility (for performance letters and guarantees). As of Dec. 31, 2015, SPXC had liquidity of approximately $451 million consisting of $101.4 million in cash and full availability under its $350 million RCF. We expect the company's liquidity will remain in the range of $400 million to $500 million over the next several years.

FULL LIST OF RATING ACTIONS

The following ratings have been affirmed and withdrawn:
--Long-term IDR at 'BB+';
--Senior secured facilities at 'BBB-/RR1'.

The Rating Outlook is revised to Negative from Stable.