TEXT - S&P revises Mueller Water Products outlook to positive

Mon Dec 10, 2012 3:53pm EST

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Overview
     -- Credit measures of Atlanta-based water infrastructure product maker 
Mueller Water Products Inc. have improved, and we believe they could reach 
appropriate levels for a higher rating in the next 12 months.
     -- We are affirming our ratings on Mueller, including the 'B' corporate 
credit rating, and revising the outlook to positive from stable.
     -- The positive outlook reflects the potential for a one-notch upgrade 
over the next 12 months if the company continues to improve credit measures 
through a combination of improved operating results and potential debt 
repayment. 

Rating Action
On Dec. 10, 2012, Standard & Poor's Ratings Services affirmed its ratings, 
including the 'B' corporate credit rating, on Mueller Water Products Inc. At 
the same time, we revised our outlook to positive from stable. 

Rationale
The outlook revision reflects the potential for a one-notch higher rating if 
Mueller continues to improve credit measures in fiscal 2013. We expect the 
company to remain disciplined with its financial policy and to potentially 
accelerate credit measure improvement through debt repayment. After several 
years of weak credit measures, we believe adjusted debt to EBITDA could 
improve to less than 5x and funds from operations to more than 12% by the end 
of fiscal 2013. 

The ratings on Mueller reflect the company's "weak" business risk profile, 
marked by its exposure to the cyclical nonresidential and residential 
construction markets. We now consider the company's financial risk profile as 
"aggressive," from "highly leveraged" previously. Credit measures have 
improved from very weak levels, and we expect them to remain consistent with 
an aggressive financial risk profile by the end of 2013. Our projections 
assume: 
     -- A continuation of the fragile domestic economic recovery, which 
supports sales growth in both the Mueller and Anvil divisions.
     -- Overall revenue growth in the mid- to high-single-digit percentage 
area this fiscal year.
     -- EBITDA margins rebounding to more than 10%.

Mueller sold its U.S. Pipe division in 2012, using a portion of the proceeds 
to redeem $22.5 million of the company's senior unsecured notes. Credit 
measures improved as a result of the sale (cash proceeds were $94 million and 
Mueller recorded a receivable of about $10 million) because of the 
unprofitable status of that division. Still, U.S. Pipe had previous periods of 
decent profitability and the sale reduced Mueller's overall product 
diversification profile. Nonetheless, we did not adjust our business risk 
profile assessment of "weak" as a result of the sale. 

Mueller maintains a good position, operating in the moderately cyclical niche 
markets of the North American water infrastructure and nonresidential 
pipe-related product markets. The company offers a full line of water 
infrastructure flow control (such as gate valves), fire hydrants, and pipe 
fittings. Over the past couple of years, Mueller has been investing in 
adjacent markets such as the advanced metering infrastructure (AMI) systems, 
leak detection, and pipe condition assessment markets, and we consider the 
company's efforts in these areas to be a work in progress.

New housing starts and replacement needs for aging water infrastructure create 
demand for Mueller's products. Residential housing starts remain low (although 
we expect them to pick up moderately), and we expect the potential for 
municipalities spending to remain weak for several years as budgetary 
pressures continue. Private nonresidential construction activity and oil and 
gas markets also fuel demand through the Anvil division, but we do not expect 
robust recovery in these areas for the next couple of years. We believe 
Mueller's geographic diversification will remain limited, with nearly all of 
its business based in North America and more than 80% in the U.S. The 
company's strengths include good casting technologies and economies of scale 
that benefit from a large installed base. 

We expect the company will maintain a low-double-digit EBITDA margin. 
Mueller's EBITDA margins have been volatile historically, and we expect some 
improvement in the next year as it has shed its unprofitable U.S. Pipe 
division and believe volume levels will grow in its other businesses. Still, 
we believe the EBITDA margin is likely to remain below peaks in the high-teens 
percentage area over the next couple of years. Raw material price movements 
and a reversal in economic prospects that reduces order volumes can 
significantly affect profitability. Our assessment of the company's management 
and governance is "fair".

We consider Mueller's financial risk profile to be aggressive and expect 
credit measures to improve somewhat in fiscal 2013, ending September 2013. For 
instance, we believe debt to EBITDA will be less than 5x, down from more than 
5x at the end of fiscal 2012. We expect Mueller's capital expenditures to 
continue to represent a moderate use of cash. We expect the company to 
continue to make small bolt-on acquisitions that complement its businesses.

Liquidity
We believe Mueller has "adequate" sources of liquidity to cover its needs over 
the next few quarters, even if its EBITDA declines unexpectedly. Our 
assessment of Mueller's liquidity profile incorporates the following 
expectations and assumptions:
     -- We expect the company's sources of liquidity, including cash and 
facility availability, to exceed its uses by 1.2x or more over the next 12 
months. 
     -- We expect net sources to remain positive, even if EBITDA declines by 
15%.

As of Sept. 30, 2012, the company had $83 million in cash and cash 
equivalents, and good capacity under its $275 million revolving credit 
facility. There are no significant debt maturities until 2015 when the 
revolver matures. Financial covenants become effective when availability under 
the facility is less than a set threshold. The company completed a refinancing 
in August 2010, when it issued $225 million of senior unsecured notes maturing 
2020 and used the proceeds to retire its term debt. 

Recovery analysis
We rate Mueller's senior unsecured notes 'B+' with a recovery rating of '2', 
indicating our expectation that noteholders would receive substantial (70% to 
90%) recovery in the event of a payment default. We rate Mueller's senior 
subordinated debt 'CCC+' with a recovery rating of '6', indicating our 
expectation of negligible (0% to 10%) recovery prospects for noteholders. Our 
updated recovery report will be published later on RatingsDirect.

Outlook
The outlook is positive. We believe credit measures could improve to levels 
commensurate with a higher rating in the next year if operating performance 
remains decent and no sizable acquisitions are undertaken that increase debt 
levels. 

We could raise the ratings in the next 12 months if credit measures continue 
to improve and if liquidity remains adequate. For example, if we believe that 
debt to EBITDA will be sustained at less than 5x and funds from operations to 
total debt will exceed 12%, we could raise the rating. 

We could revise the outlook to stable if operating performance does not 
demonstrate improvements. For example, debt to EBITDA does not improve and 
approach 5x, we could revise the outlook to stable.

Related Criteria And Research
     -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Key Credit Factors: Criteria For Rating The Global Capital Goods 
Industry, April 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed; Outlook To Positive
                                        To                 From
Mueller Water Products Inc.
 Corporate Credit Rating                B/Positive/--      B/Stable/--

Ratings Affirmed

Mueller Water Products Inc.
 Senior Unsecured                       B+                 
  Recovery Rating                       2                  
 Subordinated                           CCC+               
  Recovery Rating                       6
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