RPT-Fitch rates Stanley Black & Decker's proposed jr. subordinated debentures & equity units 'BBB'
Nov 25 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned 'BBB' ratings to the following proposed offerings by Stanley Black & Decker, Inc. (NYSE: SWK):
--$400 million principal amount of junior subordinated debentures due 2053 (will be assigned 50% equity credit);
--$300 million principal amount of equity units. The company expects the equity units will initially consist of $300 million principal amount of junior subordinated notes due 2018 and contracts to purchase, for an aggregate of $300 million, shares of the company's common stock. This security will not be assigned equity credit.
The proposed junior subordinated debentures and notes offerings will be equal in right of payment with the company's existing junior subordinated notes. The company expects to use the net proceeds of these offerings for general corporate purposes, including repayment of short term borrowings.
The Rating Outlook is Negative. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings for SWK reflect a geographically well-balanced company with leading market positions and strong brand recognition in its various business segments. The ratings also incorporate the cyclicality of certain of the company's end-markets and integration risk associated with its aggressive acquisition strategy, although overall risk is somewhat mitigated by merger integration expertise and considerable liquidity.
The Negative Outlook reflects SWK's high leverage relative to its rating level. Leverage as measured by Fitch-calculated debt to EBITDA for the LTM period ending Sept. 28, 2013 was 2.8x compared with 2.0x at year-end 2012 and 2.1x at the conclusion of 2011. Fitch expects the company's leverage will settle at around 2.4x by the end of 2013. In addition, Fitch expects SWK's leverage will decline next year as the company further realizes earnings contribution from its February 2013 acquisition of Infastech, higher revenues and modest improvement in operating margins from organic growth and restructuring initiatives undertaken in recent years along with some debt reduction. The ratings are likely to be downgraded if leverage does not improve to 2x or lower by year-end 2014.
ACQUISITION STRATEGY / PORTFOLIO TRANSFORMATION
The company has pursued a growth strategy that has resulted in geographic, end-market and customer diversification. Sales outside the United States now account for about 52% of total 2012 pro forma revenues, up from 43% in 2008. Additionally, management estimates that revenues directed to the construction and auto markets have declined from roughly 76% of pro forma 2010 revenues to about 62% of 2012 pro forma sales. The company's reliance on U.S. home centers and mass merchants has also decreased, accounting for about 18% of 2012 pro forma sales, down from 31% in 2010.
Fitch is somewhat concerned that the company continues to do acquisitions while it is still integrating large acquisitions. The sizeable Black & Decker merger, which was completed in 2010, has only been recently integrated. Yet, since 2010, the company has spent about $3.3 billion on 33 acquisitions, including three sizeable entities. In February 2013, SWK acquired Infastech for $826.4 million. Infastech designs, manufactures, and distributes highly-engineered fastening technologies and applications for various end markets. During the third quarter of 2011, the company completed the $1.2 billion acquisition of Niscayah, a commercial security firm based in Sweden specializing in electronic security systems. In July 2010, SWK also completed the $451.6 million acquisition of CRC-Evans, a supplier of specialized tools, equipment and services used in the construction of large-diameter oil and natural gas transmission pipelines.
The integration risks are somewhat mitigated by management's integration expertise as well as the fact that assimilation activities are occurring in different business segments, allowing each segment's management team to focus specifically on each individual acquisition. Furthermore, integration remains a top priority, and management has indicated that it plans to curtail any other major bolt-on acquisition activity for a period of at least 12 to 24 months while it completes ongoing integration activities.
SOLID LIQUIDITY POSITION
As of Sept. 28, 2013, SWK had $469.1 million of cash and approximately $780 million of capacity under its $2 billion commercial paper program that is backed by the company's $1.5 billion multi-year revolver maturing in 2018 and $500 million 364-day facility set to expire in 2014. Fitch believes that SWK has sufficient cushion under its financial covenants, which allows the company to have continued access to its credit facilities.
SWK has historically generated meaningful FCF. The company had Fitch-defined FCF (cash flow from operations less capex and dividends) of $276.2 million, $420.9 million and $352.2 million during fiscal years 2012, 2011 and 2010, respectively. For the LTM period ending Sept. 28, 2013, SWK had negative FCF of $21.9 million. Fitch expects SWK will generate FCF of between $100 million-$150 million this year and FCF of approximately 3%-5% of revenues in 2014.
SWK's credit metrics are weak for the rating level. Leverage for the LTM ending Sept. 28, 2013 was 2.8x compared with 2.0x at year-end 2012 and 2.1x at year-end 2011. EBITDA-to-interest was 9.5x for the same LTM period compared with 11.1x during 2012 and 11.6x during 2011. Fitch currently expects leverage will be around 2.4x and interest coverage will be roughly 9.2x at the end of 2013. The rating affirmation reflects Fitch's expectation that these credit metrics will show improvement in 2014, with leverage at around 2x and interest coverage of 9.3x at the conclusion of 2014.
ELIMINATION OF CROSS-GUARANTEES
During the second quarter of 2013, the company eliminated the cross-guarantees that previously existed as part of the merger with Black & Decker in 2010. Approximately $1.6 billion of senior notes issued by Stanley Black & Decker, Inc. were previously guaranteed by Black & Decker Corporation. Similarly, $300 million of senior notes issued by Black & Decker Corporation and $150 million of senior notes issued by Black & Decker Holdings had previously been guaranteed by Stanley Black & Decker, Inc.
Fitch continues to equalize the ratings of Stanley Black & Decker, Inc., Black & Decker Corporation, and Black & Decker Holdings at a level consistent with the consolidated profile due to a high degree of financial, legal and business integration.
Future ratings and Outlooks will be influenced by broad end-market trends, as well as company specific activity, particularly FCF trends and uses and liquidity position.
The ratings are likely to be downgraded if leverage does not improve to levels at or below 2x by year-end 2014. The Outlook could be revised to Stable if the company shows improvement in operating margins and debt-to-EBITDA approaches or goes below 2x and is sustained at this level.
While Fitch does not currently anticipate a positive rating action in the next 12-18 months, one may be considered if SWK shows significant improvement in its operating results, leading to sustained improvement in credit metrics (particularly debt-to-EBITDA levels in the 1x-1.5x range and interest coverage above 12x), and a continued robust liquidity profile.
Fitch currently rates SWK as follows:
--Issuer Default Rating (IDR) 'A-';
--Bank credit facilities 'A-';
--Senior unsecured notes 'A-';
--Junior subordinated notes 'BBB';
--Junior subordinated debentures 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Black & Decker Corporation
--Senior unsecured notes 'A-'.
Black & Decker Holdings LLC
--Senior unsecured notes 'A-'.