March 20, 2012 / 2:52 PM / 5 years ago

TEXT-S&P puts Rexnord ratings on watch positive

March 20 - Overview	
     -- U.S.-based manufacturer Rexnord LLC's ultimate parent, Rexnord Corp., 	
has amended its IPO registration and indicated a pricing expectation of 	
$18-$20 per share. 	
     -- We believe the likelihood of an IPO transaction has increased and that 	
the company would use a portion of proceeds to pay down debt, thereby reducing 	
leverage.	
     -- We are placing the ratings on CreditWatch with positive implications 	
and expect that we would raise the ratings one notch following completion of 	
the offering. 	
	
Rating Action	
On March 20, 2012, Standard & Poor's Ratings Services placed its ratings, 	
including the 'B' corporate credit rating, on Milwaukee, Wis.-based Rexnord 	
LLC on CreditWatch with positive implications. 	
	
Rationale	
The CreditWatch placement reflects our view that the likelihood of an IPO has 	
increased following the company's most recently amended S-1 registration 	
statement with the SEC. The latest update includes a pricing range for shares. 	
The company has indicated that it would use a portion of proceeds to redeem 	
$300 million in subordinated notes. This would speed up improvement of credit 	
measures, which we expect would support a higher rating. If the company is 	
successful in its IPO and retiring the subordinated notes, we expect total 	
debt to EBITDA would be close to 5x and funds from operations to total debt 	
would exceed 12% by the end of fiscal 2013. 	
	
Our fiscal 2013 estimates include the following assumptions:	
     -- 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. 	
	
Rexnord's EBITDA margins have been good at about 20%, and we expect them to 	
remain similar. Nonresidential construction remains weak, 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 improved 	
manufacturing efficiencies that have helped maintain good margins and improved 	
working-capital management.	
	
Liquidity	
Liquidity is "adequate" under our criteria. Following the recent refinancing 	
of its credit facility, the company has no meaningful near-term debt 	
maturities. The facility consists of a $180 million revolver due 2017 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. 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 	
published March 2, 2012, on RatingsDirect.	
	
CreditWatch	
The ratings are on CreditWatch with positive implications. If Rexnord 	
completes its IPO and continues to indicate its intention to repay 	
subordinated debt with a portion of proceeds, we would expect to raise the 	
ratings by one notch. 	
	
We could affirm the ratings and assign a positive outlook if the company did 	
not complete an IPO but we were confident that debt to EBITDA was on track to 	
fall to 5x, in line with a higher rating. We believe this ratio is possible in 	
fiscal 2013 if the company does not incur significant debt to finance any 	
acquisitions and if operating performance remains good.	
	
We could affirm the ratings and assign a stable outlook if the company doesn't 	
complete an IPO and we do not expect credit measures to improve meaningfully, 	
for instance if the company appears unlikely to reduce debt to EBITDA to less 	
than 6x in the next year. 	
	
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 Placed On CreditWatch	
                                        To                 From	
Rexnord LLC	
 Corporate credit rating                B/Watch Pos/--     B/Positive/--	
	
Rexnord LLC	
RBS Global Inc.	
 Senior secured                         BB-/Watch Pos      BB-	
  Recovery rating                       1                  1	
 Senior unsecured                       B-/Watch Pos       B-	
  Recovery rating                       5                  5	
 Subordinated                           CCC+/Watch Pos     CCC+	
  Recovery rating                       6                  6	
	
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.

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