-- U.K.-based engineering company Invensys PLC has agreed to
divest its rail division for GBP1.7 billion in the financial year ending March
-- We believe that the divestment, together with Invensys' use of part of
the proceeds to significantly reduce its pensions deficit, will materially
improve its credit metrics.
-- We are therefore revising our outlook on Invensys to positive from
negative, and affirming our 'BBB-' long-term corporate credit rating on the
-- The positive outlook reflects the one-in-three chance of an upgrade
over the 24-month horizon, assuming Invensys achieves credit metrics in line
with a "modest" financial risk profile and its business risk profile remains
"satisfactory" despite the reduced business diversity coming from the disposal
of the rail division.
On Nov. 30, 2012, Standard & Poor's Ratings Services revised its outlook on
U.K.-based engineering company Invensys PLC to positive from negative. At the
same time, we affirmed our 'BBB-' long-term corporate credit and issue ratings
on the company.
The outlook revision reflects our view that Invensys' credit metrics will
materially strengthen following the disposal of its rail division for GBP1.7
billion and the partial use of the proceeds to reduce its pensions deficit in
the financial year ending March 31, 2014 (financial 2014).
As part of the transaction, Invensys reached an agreement with the trustee of
its U.K. pension scheme for a long-term solution to the funding of its pension
plan. In accordance with this agreement, Invensys will make an up-front
payment of GBP400 million toward the deficit and reserve a further GBP225
in a trust for future payments if needed. In addition, Invensys will make an
immediate GBP625 million payment to its shareholders. The rest of the proceeds
will be kept by the company to finance future growth of the remaining
business. This may include acquisitions, which we estimate would not exceed
GBP150 million annually over a three-year period.
We believe that the reduction in pension contributions will support Invensys'
cash flow generation. In addition, the company's exit from large rail-related
projects may be beneficial for working capital management.
Under our base-case scenario, we estimate that Invensys will post revenues of
about GBP2.4 billion in financial 2013 and GBP1.8 billion in financial 2014. We
anticipate that Invensys' Standard & Poor's-adjusted EBITDA margin in these
years will be in the range of 7.5%-8.5%, compared with 8.2% in financial 2012,
including rail. We do not anticipate a material change in adjusted debt by
March 31, 2013, from the GBP690 million Invensys posted on Sept. 30, 2012. This
leads us to estimate funds from operations (FFO) to debt at 30% in financial
2013. With the transaction taking place in the course of financial 2014, we
calculate that Invensys will reach a net cash position on a fully adjusted
basis by March 31, 2014, assuming that acquisition-related spending does not
exceed GBP150 million per year, in line with management's indications.
We believe that the disposal of the rail division reduces business diversity,
may result in a decline of the group operating margin on revenues in the short
term, and may reinforce Invensys' exposure to economic cycles. That said, pro
forma for the transaction, Invensys will continue to benefit from satisfactory
end-market and geographic diversification as well as growing exposure to
emerging markets. We also anticipate that the company's announced strategy of
focusing on high-growth segments and high-margin products, combined with a
restructuring program to reduce overheads, should help to restore
profitability measures over the medium term.
We continue to assess Invensys' business risk profile as "satisfactory,"
albeit weakened by the reduction in diversity and long-term visibility of the
earnings in rail. An additional weakness, in our view, stems from high
execution risks relating to an increase in the contribution of emerging
markets to revenues and the early stage of large contracts in the company's
We maintain our view that the company's large installed customer base and
strong and integrated customer relationships pose material barriers to entry
for competitors. We believe that Invensys' strong positions in niche markets
support new customer gains, leading to stable revenue generation capacity.
These strengths are offset by Invensys' exposure to fragmented, highly
competitive, and cyclical industries, where it mainly competes with larger
We currently assess Invensys' financial risk profile as "intermediate." This
is supported by Invensys' strong liquidity position, which offers an
additional cushion against adverse market conditions. Large postretirement and
legacy liabilities weighing on asset-protection credit metrics pose the main
constraint to the company's financial risk profile, in our opinion. We could
revise our financial risk profile assessment to "modest" under our criteria
when the transaction closes, as long as Invensys makes scheduled payments in
line with its announced plan and avoids raising additional debt. This would
also likely require us gaining greater visibility of the company's financial
policy over the medium term.
We assess Invensys' liquidity as "strong" under our criteria. We consider
Invensys' liquidity profile to be supported by the company's policy of
maintaining ample cash on its balance sheet, the absence of financial debt due
for repayment, and what we view as proactive treasury management.
Our base-case liquidity assessment is based on the following factors and
-- We anticipate that the company's sources of liquidity (including
operating cash flows, surplus cash balances, and available/committed bank
financing) will exceed uses (capital spending and contracted cash outflows in
respect of restructuring, pension fund payments, and other obligatory
payments) by at least 1.5x over the next two years.
-- Liquidity sources will continue to exceed uses, even if EBITDA were to
decline by 30%.
-- The company appears to have good relationships with its lenders.
-- We understand that Invensys was in compliance with its financial
covenants as of Sept. 30, 2012, and we anticipate that the company will be
able to manage the covenant tests in the next 24 months.
On Sept. 30, 2012, Invensys' liquidity position was supported by GBP176 million
in cash and liquid assets, and GBP250 million undrawn from its new GBP250
revolving credit facility (RCF), part of the two-tranche GBP600 million facility
that expires in March 2017. The GBP600 million facility is subject to material
adverse change clauses and an incurrence financial covenant on leverage. This
compares positively with negligible short-term debt obligations of GBP1 million
on the same date.
The positive outlook reflects our view that there is a one-in-three chance
that we could raise the ratings if Invensys completes the rail division
disposal and reduction in pension liabilities in line with its announced
strategy. Adjusted debt reduction with the proceeds from the disposal should
allow the company to maintain adjusted FFO to debt of at least 45% in
financial 2014 and beyond under our base-case scenario.
We consider FFO to debt of about 30% in financial 2013 as commensurate with
the 'BBB-' rating. We could raise the rating if Invensys sustainably achieves
FFO to debt of at least 45% in 2014 and thereafter. Restored profitability,
positive free cash flow generation, and the absence of any new contract
delivery issues will also be important factors for any positive rating action.
We could revise the outlook to stable if Invensys fails to maintain an EBITDA
margin of 7.5%-8.5% on a fully adjusted basis in financial 2013 and after the
transaction is complete. We could also revise the outlook to stable if the
company experiences a prolonged period of negative free operating cash flow
generation. Additional cost overruns, technological or management issues
relating to project execution, or a downward revision of our business risk
profile assessment of the company could also lead us to consider revising the
outlook to stable.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit
Portal, unless otherwise stated.
-- Key Credit Factors: Criteria For Rating The Global Capital Goods
Industry, April 28, 2011
-- Management And Governance Credit Factors, March 12, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
Ratings Affirmed; CreditWatch/Outlook Action
Corporate Credit Rating BBB-/Positive/-- BBB-/Negative/--
Senior Unsecured Debt BBB- BBB-