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.