RPT-Fitch Upgrades ABB to 'A-'; Outlook Stable

Fri May 2, 2014 7:23am EDT

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May 2 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has upgraded ABB Ltd's (ABB) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'A-' from 'BBB+'. It has also affirmed its Short-term IDR at 'F2'. The Outlook is Stable. A full list of rating actions is provided at the end of this release.

The upgrade reflects Fitch's view that ABB Ltd's business and financial profile is commensurate with an 'A-' rating and can accommodate a moderate weakening of its performance in 2014. The group has improved its business profile and successfully executed on past acquisitions. It also continues to cut costs and achieve above-average profitability and healthy free cash flow (FCF). We expect funds from operations (FFO) adjusted leverage to remain below 2.5x, based on FCF of around USD1bn through the cycle. The Stable Outlook is predicated on the assumption that the group will not engage in transformational acquisitions or large share buy-back programmes during the rating horizon.

KEY RATING DRIVERS

Project Charges Burden Performance

ABB's short-term performance is impacted by low margins in its Power Systems division, which suffers from a low-margin order backlog and project charges. Fitch forecasts weaker organic growth in 2015 on largely unchanged EBITDAR margins, based on an order backlog that is USD2.7bn lower at end-1Q14 than a year earlier. We expect margin pressures to be mitigated by continued cost-cutting initiatives, which have yielded more than USD1bn annually over the past three years.

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 achievement of growth targets in the near-term.

Diversified Business Profile

ABB's 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. The group also benefits from a near-even mix between early-, mid- and late-cycle end-markets, which improved from three years ago when its business was predominantly late-cycle. In addition, its growing services business (20% of sales) provides relatively stable income and mitigates the inherent volatility of its end-markets. These factors collectively resulted in limited cyclicality during the downturn.

RATING SENSITIVITIES

Negative: Future developments that may result in negative rating action are

-FFO adjusted leverage above 3.0x (FYE13: 2.7x)

-FFO margin below 8% (FY13: 9.4%)

- FCF margin below 2% (FY13: 4.1%)

Positive: Future developments that may result in positive rating action are

-FFO adjusted leverage below 2.0x

- FFO margin above 10%

- FCF margin above 4%

LIQUIDITY

Liquidity remains strong at end-2013, supported by cash positions of USD6.0bn and an undrawn USD2.0bn revolving credit facility. Coupled with FCF in excess of USD1.5bn expected for 2014, this should be sufficient to cover just over USD450m in debt maturities in 2014.

The rating actions are as follows:

Fitch has simultaneously upgraded ABB Treasury Center (USA), Inc's (ABB TC), ABB Finance (USA) Inc.'s, ABB Finance B.V.'s senior unsecured ratings to 'A-' from '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.

ABB Ltd

Long-Term Issuer Default Rating: upgraded to 'A-' from 'BBB+'

Short-Term Issuer Default Rating: affirmed at 'F2'

Senior unsecured debt: upgraded to 'A-' from 'BBB+'

ABB Finance (Australia) Pty Limited

Senior unsecured debt: upgraded to 'A-' from 'BBB+'

ABB Capital B.V.

Commercial paper programme: affirmed at 'F2'

ABB Finance (USA) Inc.

Senior unsecured debt: upgraded to 'A-' from 'BBB+'

ABB Finance B.V.

Senior unsecured debt: upgraded to 'A-' from 'BBB+'

ABB Financial Services AB

Commercial paper programme: affirmed at 'F2'

ABB Treasury Center (USA), Inc

Senior unsecured debt: upgraded to 'A-' from 'BBB+'

Commercial paper programme: affirmed at 'F2'