TEXT-S&P rates Pentair Ltd 'BBB'

Fri Sep 28, 2012 4:59pm EDT

Overview
     -- U.S.-based manufacturer of water treatment and storage products 
Pentair Inc. has completed its merger with Tyco International Ltd.'s flow 
control business.
     -- We are raising our ratings, including the corporate credit rating, on 
Pentair Inc. to 'BBB' from 'BBB-' and subsequently withdrawing the corporate 
credit rating. 
     -- We are assigning a 'BBB' corporate credit rating to the newly formed 
parent company Pentair Ltd. and affirming our 'BBB' issue-level rating on the 
company's senior secured notes.
     -- The outlook is stable, reflecting our expectation that the combined 
entity will maintain credit measures and financial policies commensurate with 
the rating.

Rating Action
On Sept. 28, 2012, Standard & Poor's Ratings Services raised its ratings on 
Golden Valley, Minn.-based Pentair Inc., including the corporate credit 
rating, to 'BBB' from 'BBB-'. We removed the ratings from CreditWatch, where 
we listed them with positive implications on March 28, 2012, and assigned a 
stable outlook. Subsequently, we withdrew the corporate credit rating on 
Pentair Inc. and assigned a 'BBB' corporate credit rating to the newly formed 
parent company, Schaffhausen, Switzerland-based Pentair Ltd. (Pentair). We are 
also affirming our 'BBB' issue-level rating on the company's senior secured 
debt. The outlook is stable.

Rationale
The upgrade follows the completion of Pentair Inc.'s merger with Tyco 
International Ltd.'s (A-/Stable/A-2) flow control business (Tyco Flow). In our 
view, the additional diversity, scale, and scope of the combined entity 
supports a stronger business risk profile than Pentair Inc. on a stand-alone 
basis. We expect the new Pentair to benefit from stable demand in industrial 
markets and cost synergies thereby leading to improved operating performance 
and credit measures, including total debt to EBITDA of about 2x on a pro forma 
basis. In our forecast, we assume the company's revenues will increase 
modestly as demand from industrial markets offsets weak municipal spending in 
North America. We believe productivity gains and modest price increases could 
result in operating margins (before depreciation and amortization) of about 
15%, which should support good free cash flow generation of about $600 million 
annually.

The ratings reflect our assessment of Pentair's business risk profile as 
"satisfactory" and financial risk profile as "intermediate." We expect the 
company to generate about $7.7 billion of pro forma 2012 revenues in three 
segments: water and fluid solutions (about 45% of revenues), flow control 
(30%), and equipment protection solutions (25%). The company is likely to 
continue to hold the No. 1 or 2 position in most of its end markets. End 
market diversity benefits from the meaningful addition of revenues from energy 
markets and the reduction of Pentair's exposure to the U.S. residential market 
to about 20% from about 35% of revenues. Geographic diversity also improves 
with the merger: the company will generate more than half of its revenues 
outside the U.S. In addition to cost synergies, Pentair is likely gain access 
to new markets and customers that Tyco Flow serves, offering possible 
additional revenue. Offsetting these positive attributes is our expectation of 
Pentair's continued presence in fragmented and cyclical end markets. Also, the 
addition of Tyco Flow's water business introduces less predictable, 
project-based revenues. 

The improved business risk profile should support improved operating prospects 
and cash flow generation. Cost synergies are likely to enable the company to 
maintain operating margin (before depreciation and amortization) of about 15%. 
We expect stable margins and annual capital expenditures of approximately 2.5% 
of revenues to enable the company to generate about $600 million in free cash 
flow annually. As of June 30, 2012, pro forma total debt to EBITDA was about 
2x, in line with our expectation of 2.0x-2.5x for the rating.

Liquidity
We believe Pentair has "adequate" sources of liquidity to cover its needs in 
the near term, even if its EBITDA declines unexpectedly. Our assessment of the 
company's liquidity profile incorporates the following expectations and 
assumptions:
     -- We expect Pentair's sources of liquidity, including cash and facility 
availability, to exceed its uses by 1.2x or more over the next 12 to 18 months.
     -- We expect net sources to remain positive, even if EBITDA declines by 
15%.
     -- We believe it could absorb low-probability, high-impact shocks.

Pentair has access to a $1.45 billion revolving credit facility, which matures 
in September 2017. The company has no significant near-term maturities. We 
expect the company to use the bulk of its free cash flow to make small to 
midsize acquisitions, pay a dividend, and repurchase shares.

Outlook
The outlook is stable. We expect Pentair will continue to benefit from the 
global recovery in industrial markets and to maintain operating margins in the 
midteens, partly because of cost synergies from the merger with Tyco's flow 
control business. We could lower the ratings if softer operating performance 
or debt-financed activities result in significantly weaker credit measures for 
a sustained period--for instance, if total debt to EBITDA is likely to remain 
above 2.5x. An upgrade would require the company to display a 
more-conservative financial policy and achieve credit measures appropriate for 
higher ratings, such as maintaining total debt to EBITDA of less than 2x.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Upgraded; Removed From CreditWatch
                                        To                 From
Pentair Inc.
 Corporate Credit Rating                BBB/Stable/--      BBB-/Watch Pos/--
 Senior Unsecured                       BBB                BBB-/Watch Pos

Ratings Withdrawn 

Pentair Inc.
 Corporate Credit Rating                NR                 BBB/Stable/--  

New Rating; Outlook Stable

Pentair Ltd.
 Corporate Credit Rating                BBB/Stable/--      

Ratings Affirmed

Pentair Finance S.A
 Senior Unsecured                       BBB
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