March 1, 2012 / 8:37 PM / 5 years ago

TEXT-S&P assigns Rexnord 'BB-' rating

 (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)	
 

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