Nov 14 - Fitch Ratings assigns a rating of 'BBB+' to Eaton Corporation's (Eaton) proposed issuance of senior unsecured notes which are being offered under Rule 144A. Proceeds will be available to help fund the acquisition of Cooper Industries plc (Cooper) that is expected to close in the fourth quarter of 2012. The Rating Outlook is Negative. A detailed ratings list follows at the end of this release.
The issuer of the notes is Turlock Corporation which will be merged into Eaton upon completion of the Cooper acquisition. The notes will be guaranteed by Eaton Corporation Limited (ultimate parent), Turlock B.V. and Eaton Inc. The notes will also be guaranteed by certain subsidiaries that will guarantee Eaton's revolving credit facilities, including certain of Eaton's subsidiaries upon completion of the Cooper acquisition, and certain of Cooper's subsidiaries within 40 days after the acquisition has been completed.
Fitch's ratings for Eaton incorporate the increase in debt and leverage associated with the pending acquisition of Cooper. The acquisition price is approximately $11.8 billion, not including approximately $1.4 billion of debt at Cooper as of Sept. 30, 2012 that will be guaranteed by Eaton. Eaton plans to fund the transaction with equity, available cash, and approximately $5.1 billion of new debt, including the proposed senior unsecured notes. Fitch estimates pro forma debt/EBITDA at closing of the acquisition will be approximately 3.3x compared to Eaton's standalone leverage of 1.84x at Sept. 30, 2012.
The Negative Outlook reflects the potential for sustained high leverage if Eaton is unable to realize expected synergies following its acquisition of Cooper, or if financial results are pressured by a slowdown in Eaton's electrical and other industrial end markets. Some of Eaton's key end markets are experiencing weaker demand including heavy duty trucks, construction equipment, certain international electrical markets, the aerospace aftermarket and the automotive market in Europe. Eaton has taken steps to reduce its cost structure in the truck and international electrical businesses which should mitigate the negative impact of volume pressure on margins. Other rating concerns include normal integration risks, the negative impact on leverage if Eaton makes additional debt-funded acquisitions in the near term, which Fitch believes is unlikely, and the company's sizeable underfunded pension obligation.