NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign a Long-Term Issuer Default Rating (IDR) of 'BBB+' and a Short-Term IDR of 'F2' to ITT Inc. (ITT). In addition, Fitch expects to assign a rating of 'BBB+' to ITT's senior unsecured credit facility. The Rating Outlook is Stable. A full list of the expected rating actions follows at the end of this release.
As part of the restructuring plan, ITT Corporation will redeem all of its outstanding commercial paper and assign its current credit agreement to the company's new ultimate parent, ITT Inc., which will be publicly listed. The former holding company, ITT Corporation, will cease to have debt outstanding as it will be converted to an operating subsidiary and an LLC. ITT has primarily undergone this restructuring in order to enhance its management abilities associated with the company's legacy asbestos liabilities.
Fitch views the reorganization as neutral from a credit perspective. The restructured company will be operating under identical financial metrics, capitalization, liquidity and matching financial covenants under its senior unsecured credit facility. The company's credit agreement has not been amended in a material manner as a result of this transaction. All of the company's debt will remain unsecured as there are no parental or subsidiary guarantees within the firm's organizational structure. In addition, nearly all of the operating subsidiaries will continue to be engaged in activities substantially similar to those that the subsidiaries have been engaged in historically.
KEY RATING DRIVERS
Fitch views the reorganized ITT credit profile as identical to is predecessor. The company's rating continues to incorporate its well-established market positions, cyclical end-markets, competitive operating environment, solid liquidity and organic growth in key end-markets. ITT has achieved sizable market share gains with the Motions Technologies reporting segment by increasing sales to original equipment manufacturers (OEMs) and expanding its aftermarket presence. The company's large installed base allows it to derive approximately 30% of revenue and a large portion of operating income from aftermarket sales, affording the company relative revenue and margin stability during economic downturns. ITT benefits from a balance across business cycles and from conservative financial policies that include its commitment to maintain investment grade ratings.
Fitch expects ITT to have moderate debt and low leverage metrics including debt/EBITDA below 1.0x even after acquisitions. Fitch expects the company's post dividend free cash flow (FCF) to be roughly $120 million in 2016 compared to $100 million in 2015. Fitch expects total debt at the end of 2016 to be in the $300 million range. Low leverage mitigates the company's sizable asbestos liabilities retained subsequent to ITT's separation from Xylem Inc. and Exelis Inc. in 2011. ITT has also improved operating margins materially in recent years, further contributing to its improved cash flow generation.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for ITT include:
--Flat-to-slightly declining sales in 2016 driven by soft global end-markets;
--EBITDA margins north of 16% through the medium term;
--Future acquisitions will be funded largely from FCF;
--Moderate dividend growth in the intermediate term with steady shareholder buybacks at current levels;
--Limited additional negative currency effects in the intermediate term;
--Capital expenditures will remain steady in the range of 4% to 5% of revenue annually.
RATING SENSITIVITIES
Developments that may individually or collectively lead to a negative rating action include:
--A sizable increase in cash outflows associated with asbestos claims due to a large settlement or significant revision of net asbestos liabilities;
--Debt/EBITDA above 1.5x for a sustained period;
--Total adjusted debt/EBITDAR (including net asbestos liabilities) above 3.0x and funds from operations (FFO) adjusted leverage (including net asbestos liabilities) above 3.5x. These adjusted measures partly capture the impact of asbestos liabilities; however, they are not viewed by Fitch as replacing ITT's other credit metrics;
--Debt-funded acquisitions;
--Debt-funded shareholder-friendly activity.
Fitch is unlikely to consider a positive rating action in the near future given ITT's size relative to its significant asbestos liabilities. Fitch may consider a positive rating action if the company's asbestos liabilities and corresponding expected future cash outlays decline significantly.
LIQUIDITY
ITT's liquidity includes $350 million of additional availability under its $500 million revolver which is utilized to support its commercial paper (CP) program which had $150 million of debt outstanding as of December, 2015. A majority of ITT's $416 million of cash and equivalents was held in international subsidiaries and is considered indefinitely reinvested outside of the U.S. Despite the company's high foreign-domiciled cash balance, it has effectively identified and continues to look for opportunities to access cash balances in excess of local operating requirements to meet its global liquidity needs in a cost-efficient manner. Net cash distributions from foreign countries amounted to $235 million and $139 million during 2015 and 2014 respectively. ITT's credit facility matures in November of 2019.
FULL LIST OF RATING ACTIONS
Fitch expects to assign the following long-term ratings to ITT Inc.:
--Long-Term IDR 'BBB+';
--Senior unsecured credit facility 'BBB+'.
Fitch expects to assign the following short-term rating to ITT Inc.
--Short-Term IDR 'F2'.
The Rating Outlook is Stable.
Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004046
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