RPT-Fitch Affirms ABB at 'BBB+'; Outlook Stable
April 19 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed ABB Ltd's (ABB) Long-term Issuer Default Rating (IDR) at 'BBB+', senior unsecured ratings at 'BBB+' and Short-term IDR at 'F2'. Fitch has simultaneously affirmed ABB International Finance Ltd's (ABB IF), ABB Treasury Center (USA), Inc's (ABB TC), ABB Finance (USA) Inc.'s and ABB Finance B.V.'s senior unsecured ratings at 'BBB+'. The ratings of the commercial paper programmes issued by ABB Financial Services AB (ABB FS), ABB Capital B.V. (ABB Capital) and ABB TC have been affirmed at 'F2'. The Outlook is Stable.
KEY RATING DRIVERS
Flat organic group order intake in 2012 and price competition point to continued margin pressures in H113. Fitch forecasts group revenue growth in the mid- to high single-digits (including M&A) and EBITDAR margins in the mid-teens in the next two years. However, we expect margin pressures to be mitigated by cost-cutting initiatives, which yielded USD1.1bn in 2011 and 2012.
Emerging Markets Drive Growth:
Organic growth over the next two years will be supported by the group's above-average exposure to emerging markets (EMs) compared with other rated capital goods companies. The group generates around 50% of its revenues in EMs and we expect the share of revenues from these regions to grow further. However, orders in 2012 started to weaken in Asia, which represents more than a quarter of the group's revenues and this may challenge the achievement of growth targets in the near term.
Diversified Business Profile:
ABB Ltd's strengthening business profile benefits from leading positions in the power and automation equipment markets, its size and scale, a high level of product and geographical diversification and an above-average exposure to high-growth, low-cost emerging markets, which collectively resulted in limited cyclicality during the downturn. ABB's acquisition of Thomas & Betts Corporation (TNB) strengthened the group's diversification further and increased its exposure to the US low-voltage market.
ABB's financial flexibility remains adequate, although the fully cash-financed USD3.9bn acquisition of TNB represented a sizeable transaction for the group. We expect funds from operations (FFO) adjusted leverage to remain above 3.0x in 2013. The company was free cash flow neutral in 2012 and we consider a substantial reduction in leverage in 2013 unlikely, given difficult European markets.
Upward Pressure Possible:
The ratings could be subject to renewed upward pressure, if the group successfully executes on its M&A policy and if FFO adjusted leverage reduces to around 2.5x, FFO fixed charge remains above 6.0x and FFO margin remains above 8%.
Increase in Leverage:
A downgrade is unlikely in the near term, but could materialise if FFO adjusted leverage remains above 3.5x through the cycle.
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