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(The following statement was released by the rating agency)
Nov 16 - Fitch Ratings has affirmed AB Electrolux's (Electrolux) Long-term Issuer Default Rating (IDR) and senior unsecured notes at 'BBB'. The Outlook on the Long-term IDR is Negative.
The Negative Outlook principally reflects Fitch's concern that Electrolux's financial profile, specifically its cash generation and leverage ratios, may not return to a level commensurate with a 'BBB' rating in the short term. While the company has made positive progress during the first nine months of 2012 towards improving these metrics, enhancing the flexibility of its cost structure as well as its exposure to developing markets, it continues to face considerable challenges in its largest markets and pressure from raw material prices.
Throughout 2012, end-market demand in Electrolux's two major markets of Europe and North America has been weak, and is unlikely to materially improve in the short term. Despite this, in the first nine months of the year, the company has been successful in lifting its EBITDA and funds from operations (FFO) margins, to 7.4% and 5.9%, respectively, from 6.7% and 5.4% in the corresponding period last year. This has chiefly been the result of improved internal efficiencies as well as lower steel prices. Fitch expects the rate of improvement over the course of 2012 to be maintained into 2013, with these key ratios reaching levels in excess of 8% and 7%, respectively, by end-2013.
Following their material deterioration in 2011, leverage metrics have also improved over the course of 2012. At 30 September 2012 the company's gross lease-adjusted leverage was 2.6x (using the last 12 months (LTM) FFO) from 3.8x at end-2011, while the net lease adjusted leverage was 1.7x, from 2.4x at end-2011. Fitch expects these ratios to further improve to the low-mid 2x and 1x level respectively by end-2013, levels which would place the company firmly within the parameters of the current rating. Fitch's assumptions are based on no significant debt funded acquisitions taking place over the course of 2013. Fitch would treat any acquisitions beyond the scope of management's declared intentions to spend up to SEK1-2bn on M&A in the short to medium term as event risk.
The ratings reflect Electrolux's strong market position as one of the world's largest household and professional appliance manufacturers, especially in Europe, North America and Latin America. Electrolux's size, geographical diversification and conservative financial profile support the ratings, as does its strong liquidity position (with short-term sources covering short-term uses of liquidity by 2.5x as of end-Q312).
However, the ratings continue to be constrained by the mature, cyclical and highly competitive nature of the European and North American appliance markets. Electrolux's exposure to fluctuating raw-material prices and foreign exchange rates are also weaknesses, as is the company's relatively limited free cash flow (FCF) generation. Furthermore, increasing competition from lower-cost emerging market producers may present a threat over the medium term, especially in lower-end product lines.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- FFO based lease adjusted net leverage above 2x
- FFO margin below 7%
- Negative FCF
- Large debt-funded acquisitions
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- FFO based lease adjusted gross and net leverage below 2.5x and 0.75x, respectively
- FFO margin above 8%
- FCF margin above 3%
- A material improvement in the business profile, such as diversification and / or a significant improvement in cash flow stability.