(The following statement was released by the rating agency) Overview
-- U.S.-based manufacturer Rexnord LLC and its immediate parent, RBS Global Inc., are obtaining a $1.13 billion senior secured credit facility to refinance the existing credit facility, due 2013.
-- We are assigning the proposed facility a 'BB-' issue rating and a '1' recovery rating. We are simultaneously affirming our other ratings, including the 'B' corporate credit rating, on Rexnord LLC.
-- The positive outlook reflects the potential for an upgrade if the company continues to improve credit measures. Rating Action On March 1, 2012, Standard & Poor's Ratings Services assigned issue-level ratings of 'BB-' (two notches above the corporate credit rating) to Milwaukee, Wis.-based Rexnord LLC's proposed senior secured $1.13 billion credit facility, comprising a $180 million revolver due 2017 and a $950 mil. term loan due 2018. Its immediate parent, RBS Global Inc., is co-borrower of the facility. We also assigned the facility a recovery rating of '1', indicating our expectation that lenders would receive very high (90%-100%) recovery in the event of a payment default. At the same time, we affirmed our existing ratings, including the 'B' corporate credit rating, on Rexnord LLC. The outlook is positive. Rationale The affirmation reflects our expectation that Rexnord is likely to continue improving its currently weak credit measures through fiscal 2013 even though end-market conditions remain mixed. Rexnord is highly leveraged: We expect debt to EBITDA to be more than 6.5x and funds from operations (FFO) to adjusted debt to be slightly less than 10% at the end of fiscal 2012 (ending March 2012). We expect these metrics to improve to less than 6x and more than 10%, respectively, in the next year even if the company's IPO plans are unsuccessful. The company's ultimate parent, Rexnord Corp., recently updated its S-1 registration statement with the SEC for an IPO of up to $700 million. If successful, the company has indicated plans to use a portion of the proceeds to repay up to $300 million of subordinated notes due 2016 (equivalent to about .8x EBITDA). The acquisition last year of Germany-based VAG Holding GmbH, for about $240 million, should bolster Rexnord's water management segment while domestic construction remains weak. We expect better market conditions for the process and motion control segment (about 70% of fiscal year-to-date sales), which serves primarily industrial customers. We believe the company will post revenue and EBITDA growth of more than 10% in fiscal 2013 and free cash flow generation of more than $100 million. Our assessment of the company's "fair" business risk profile mitigates its "highly leveraged" financial risk profile, as our criteria define these terms. Our business risk assessment incorporates the expectation that Rexnord will maintain good market positions and engineering capabilities. The company has a broad product portfolio within markets it serves and operates with fair geographic diversity. The company benefits from a large percentage of aftermarket sales but is subject to cyclical swings. Demand from its local and regional government customers is also uncertain at the moment because of municipal budget strains. We expect the company to generate more than $2 billion in sales in fiscal 2013. Rexnord's EBITDA margins have been good at about 20%, and we expect them to remain in this area. Near-term prospects remain weak for nonresidential construction, but Rexnord's water segment has performed reasonably well despite this, likely because of market share gains. The process and motion control segment should continue to benefit from ongoing modest growth in the general economy. We expect adjusted capital expenditures to be moderate, averaging 3%-4% of sales. We consider Rexnord's working capital as a percentage of sales to be relatively high (although improved over the past couple of years), due in part to the company's extensive distribution network. The company appears to have made improvements related to manufacturing efficiencies that have helped maintain good margins and improved working-capital management. Liquidity Liquidity is "adequate" under our criteria. Following completion of the proposed refinancing of its credit facility, the company will have no meaningful near-term debt maturities. The proposed facility consists of a $180 million revolver due 2016 and a $950 million term loan due 2018. The company had about $220 million in cash as of Dec. 31, 2011. Our assessment of Rexnord's liquidity profile incorporates the following expectations and assumptions:
-- We expect the company's sources of liquidity, including cash and facility availability, to exceed its uses by 1.2x or more over the next 12 months;
-- We expect net sources to remain positive, even if EBITDA declines by 20%; and
-- We believe the company could absorb low-probability, high-impact shocks. We also expect the company to maintain comfortable cushion under the senior secured net leverage covenant when the credit facility is completed. In addition, Rexnord has a $100 million accounts-receivable program that expires in 2016. Recovery analysis For the complete recovery analysis, see the recovery report on Rexnord to be published following this release on RatingsDirect. Outlook The outlook is positive. We expect Rexnord to continue to reduce leverage by increasing profits and believe it could continue to reduce its funded debt balances with cash flow generation. We could raise the ratings if we were confident that debt to EBITDA would ultimately fall to 5x, in line with a higher rating. We believe Rexnord could approach this level in fiscal 2013 if the company does not incur an significant debt to finance acquisition and if operating performance remains good. We believe Rexnord is very likely to achieve these credit measures if its parent completes its IPO and uses the proceeds to repay debt. We could revise the outlook to stable if significant debt-financed acquisitions or weaker operating performance stalls improvement in credit measures, for instance if the company appears unlikely to reduce debt to EBITDA to less than 6x or if financial policy becomes more aggressive. For instance, if Rexnord were to pay a meaningful dividend to its private-equity owner that delays achievement of ratios indicative of a higher rating, we would likely revise the outlook to stable. Related Criteria And Research
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed Rexnord LLC Corporate credit rating B/Positive/-- Senior secured BB- Recovery rating 1 Senior unsecured B- Recovery rating 5 Subordinated CCC+ Recovery rating 6 Ratings Assigned Rexnord LLC RBS Global Inc. Senior secured $950 mil. term loan due 2018 BB-
Recovery rating 1 $180 mil. revolver due 2017 BB-
Recovery rating 1 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. (New York Ratings Team)