NEW YORK--(BUSINESS WIRE)--Fitch Ratings has placed Issuer Default Ratings (IDR) and ratings of senior secured facilities and senior unsecured notes for SPX Corporation (SPX) on Rating Watch Negative. The action reflects SPX's plan to spin off its Flow Technology business into a standalone company (FlowCo) as announced on Oct. 29, 2014. Fitch's ratings cover approximately $1.4 billion senior secured and unsecured indebtedness. The company's full rating list follows at the end of this release.
KEY RATING DRIVERS
The Negative Watch reflects Fitch's concerns regarding SPX's post spin-off capital structure, expected reduction in product and end-market diversification, and increased exposure to highly cyclical end-markets. The remaining businesses are expected to have noticeably lower operating margins and smaller aftermarket content, potentially increasing SPX's exposure to economic cycles.
Fitch's other concerns include SPX's willingness to maintain higher leverage than its stated leverage range for a prolonged period of time and future cash deployment strategy, which currently focuses on share repurchases and acquisitions. Additionally, Fitch is cautious regarding SPX's overall business strategy and growth opportunities post spin-off as the company has focused primarily on growing its Flow Technology segment over the past decade.
On Oct. 29, 2014, SPX announced a commencement of consent solicitation, under which the company requested a consent solicitation to amend an indenture of currently outstanding $600 million senior unsecured notes. The proposed amendments will allow the company to transfer certain SPX assets to FlowCo. Additionally, the notes will become FlowCo's obligations and will be guaranteed by FlowCo's subsidiaries. The failure to obtain the consent will result in the notes remaining SPX's obligation, but without guarantees from FlowCo or its subsidiaries. The consent solicitation will expire on Nov. 7, 2014.
Fitch estimates that FlowCo will account for approximately 60% and 74% of SPX's pro forma 2014 revenues and EBITDA, respectively. SPX's management expects credit metrics of FlowCo and remaining SPX will be consistent with the company's current credit profile which includes a gross debt/EBITDA target of 1.5x to 2.5x as defined in its bank agreement (the ratio is understated when compared to Fitch's calculation).
The spin-off will create a pure-play flow company that will consist of SPX's Flow Technology segment and Hydraulic Technologies business which is a part of the Industrial segment. SPX will retain its Thermal segment and the majority of the Industrial segment serving customers in the power market and providing products in HVAC and specialty infrastructure sectors. The spin-off is expected to be completed within 12 months from the announcement. SPX does not expect to receive a cash dividend as part of the transaction.
SPX's current ratings are supported by solid operating cash generation; good product and geographic diversification; management's track record in successfully integrating acquisitions; sizable revenues from the higher-margin aftermarket business; and solid backlog. During 2013, SPX addressed Fitch's concern as to the underfunded status of its U.S. pension plan liabilities by making a $250 million voluntary contribution. The company also transferred its U.S. qualified monthly pension payment obligations for current retirees to Massachusetts Mutual Life Insurance Company along with other actions in early 2014 which significantly reduced its U.S. qualified pension obligations.
SPX's leverage (debt-to-EBITDA) has declined to approximately 2.9x at Sept. 27 2014, down from 3.5x at the end of 2013, driven by improvements in operating performance and the repayment of $500 million senior unsecured notes. The company has maintained strong liquidity of approximately $1 billion over the past several years. At Sept. 27, 2014, SPX's liquidity of $788 million consisted of $502 million in cash and $286 million of availability under its revolving credit facilities.
SPX's free cash flows (FCF) has been week over the past two years driven by a $250 million voluntary cash contribution towards its U.S. pension plans in 2013 and a significant investment in net working capital in connection with the ClydeUnion acquisition in 2012. Fitch expects SPX will generate above $500 million FCF in 2014 primarily driven by a sale of its 44.5% joint venture interest in EGS Electrical Group LLC to Emerson Electric Co. for $574 million (or approximately $350 million after tax). Fitch expects pre-spin-off SPX will generate positive FCF in the range of $150 million to $200 million annually over the next several years.
RATING SENSITIVITIES
Fitch expects to resolve the Negative Watch when the company provides further details regarding its post spin-off capital structure. Fitch's future rating actions will take into account detailed analyses of the post spin-off company including but not limited to such quantitative and qualitative factors as expected leverage through the business cycle, business cyclicality, cash generation patterns and seasonality, expected liquidity, and future growth strategies.
Fitch has placed the following ratings on Negative Watch:
-- IDR 'BB+';
-- Senior secured bank facilities 'BB+';
-- Senior unsecured debt 'BB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=911914
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