(The following statement was released by the rating agency)
Nov 06 -
Summary analysis -- ABB Ltd. -------------------------------------- 06-Nov-2012
CREDIT RATING: A/Stable/A-1 Country: Switzerland
Primary SIC: Engineering
Mult. CUSIP6: 000375
Credit Rating History:
Local currency Foreign currency
08-Jun-2010 A/A-1 A/A-1
23-Apr-2007 A-/A-2 A-/A-2
The ratings on Swiss engineering group ABB Ltd. reflect Standard & Poor’s Ratings Services’ view of the group’s “strong” business risk profile, leading global market positions, strong technology base, and good earnings diversity in its core businesses of automation and power transmission and distribution. Our assessment of ABB’s financial risk profile as “modest” reflects the company’s solid balance sheet and liquidity, sound free operating cash flow (FOCF) generation through the cycle, and robust financial flexibility. We also anticipate that the group will maintain a conservative financial policy.
S&P base-case operating scenario
In our base-case scenario for 2012 we expect slow organic growth for ABB in the face of challenging global economic conditions. Despite mixed conditions in ABB’s end markets, the group’s order intake has been stable, supporting our view that it is not facing any major downturn. ABB’s solid geographic diversity is also a supportive factor, with the weakness currently seen in Europe and Asia (excluding China) being offset by solid growth in North America and the Middle East, in combination with stabilizing demand in China.
In our view, ABB continues to face slower end markets and pricing pressure in some product areas, mainly within the power products division. However, we expect the company to maintain a reported EBITDA margin of 14%-15% in 2012 due to forceful cost-cutting and a positive contribution from recently acquired Thomas & Betts. The large currency swings that we are seeing have affected ABB’s quarterly profit-and-loss statements, mainly due to translation effects rather than underlying profitability. On a longer term basis, the company has stated that it estimates a 10% devaluation of the U.S. dollar could cut the EBIT margin by about one percentage point.
ABB’s public 2011-2015 targets include an operational EBITDA margin of 13%-19% (after 15.8% in 2011). Operating EBITDA excludes unrealized derivative gains and losses and expenses related to restructuring and acquisitions.
S&P base-case cash flow and capital-structure scenario
At the end of September 2012, ABB’s gross debt had increased to $9.1 billion, compared with $4.0 billion at end-2011, following the Thomas & Betts acquisition. Cash and marketable securities remain very solid at $5.4 billion, supporting ABB’s strong liquidity.
Despite the marked increase in debt, we expect ABB’s debt protection measures to remain in line with the figures we view as commensurate with the ratings--that is adjusted funds from operations (FFO) to debt of more than 45% and adjusted debt to EBITDA of less than 2x. This is due to our expectation that ABB’s sales and margins will be stable and its cash flow generation solid. For 2012 we expect ABB to generate FFO of about $4 billion compared with $4.3 billion in 2011, and FOCF of about $2.0 billion compared with $2.9 billion in 2011.
Our ‘A-1’ short-term rating reflects our view that ABB’s overall liquidity is “strong”.
On Sept 30, 2012, ABB’s liquidity resources consisted of:
-- Cash and marketable securities of about $5.4 billion, of which we estimate about $3.4 billion is readily available.
-- A $2 billion committed syndicated credit facility maturing in October 2015, unrestricted by material adverse change clauses and without financial covenants.
-- FOCF generation that we estimate at more than $2.5 billion a year over the medium term.
These resources compare with short-term commercial paper maturities of less than $1 billion and a EUR700 million bond maturing in 2013.
We see ABB’s standing in the capital markets as strong and are confident that its liquidity position will remain strong.
The stable outlook factors in our anticipation that ABB will continue to balance investments, acquisitions, and shareholder payouts to achieve cash flow protection ratios that we view as adequate for the current rating.
We expect that ABB’s operational and financial performance will continue to be solid, despite increasing uncertainty about the global economy. Taking into account ABB’s more acquisitive policy and our cautious economic outlook, we expect that it will achieve adjusted FFO to debt of more than 45% and adjusted debt-to-EBITDA of 1.5x-2x over the next two years, even though 2013 may potentially be challenging.
Following the Thomas & Betts acquisition, ABB’s flexibility to make further strategic acquisitions has declined, in our opinion, at least over the medium term. However, we anticipate that the group will continue to make bolt-on acquisitions, albeit at a slower pace, in 2013 and 2014.
Ratings downside could increase if ABB were to adopt a more aggressive financial policy, including continued very large debt-funded acquisitions, in a market downturn, or if margins deteriorated by 100-200 basis points or more in combination with negative sales growth.
We see limited ratings upside given the combination of business and financial risk, but we could consider an upgrade if the company were to demonstrate a sustained and strong financial performance that exceeded ratios we consider commensurate with the current rating.