TEXT-S&P rates Pentair Ltd 'BBB'
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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