CHICAGO - (Business Wire) Fitch Ratings has affirmed the ratings for Eaton Corporation (Eaton) (NYSE: ETN) and removed the ratings from Rating Watch Negative. The Rating Outlook is Negative. The action follows the company's recently announced issuance of new equity that is expected to generate approximately $1.43 billion of net proceeds. Eaton plans to use the funds to pay down its bridge facility, including commercial paper backed by the facility that was used to fund the recent acquisitions of The Moeller Group (Moeller) and Phoenixtec that totaled nearly $3 billion.
Fitch's ratings for Eaton are as follows:
--Issuer Default Rating (IDR) 'A';
--Senior unsecured bank facilities 'A';
--Senior unsecured debt 'A';
--Short-term IDR 'F1'.
--Commercial paper 'F1'.
Approximately $4.2 billion of debt was outstanding at March 31, 2008.
The removal of Eaton's ratings from Negative Rating Watch reflects the resolution of uncertainty surrounding the company's mix of debt and equity used to fund its recent acquisitions of Moeller and Phoenixtec. Eaton's new equity strengthens its balance sheet and significantly reduces the amount of outstanding debt that was used to fund the acquisitions. Despite the new equity, leverage remains high for the rating category. The assignment of a Negative Rating Outlook incorporates this concern as well as concerns about integration risk related to the acquisitions, economic risk, and weak domestic demand in Eaton's Truck and Automotive segments. As part of its plans for financing the recent acquisitions, Eaton can be expected to issue long-term debt that would be used to replace a substantial portion of remaining short-term debt that is supported by the bridge facility. In addition, Fitch anticipates that Eaton will deploy its free cash flow to reduce debt in a manner consistent with the company's stated goal of maintaining its existing ratings over the long term. As a result, discretionary spending for additional acquisitions or share repurchases is likely to be modest in the near term. A return to a Stable Rating Outlook will depend on Eaton's ability to strengthen its credit protection measures within the next 12-18 months. Even before the acquisitions of Phoenixtec and Moeller, these measures had been somewhat weak due to Eaton's active acquisition program, and Fitch would look for stronger measures over the long term. The ratings could be downgraded if weaker-than-expected free cash flow or large discretionary spending were to prevent an improvement in Eaton's credit protection measures.
The acquisitions of Phoenixtec and Moeller were completed in February and April of 2008, respectively. They are part of Eaton's Electrical segment and should further improve its competitive position. Restructuring costs related to the acquisitions are estimated by Eaton at $195 million over three years. Cost savings from the restructuring are expected to be as much as $145 million annually by 2010. Integration risks are mitigated by the solid operating performance at both acquired companies.
Eaton's debt of $4.2 billion at March 31, 2008 consisted of $2.7 billion of long-term debt and nearly $1.5 billion of short-term debt. After adjusting for the Moeller acquisition and the issuance of new equity, Fitch estimates short-term debt would be approximately $1 billion higher on a pro forma basis. As a result, Eaton's credit measures are expected to be weak in the near term until it is able to reduce debt. Much of the short-term debt, including commercial paper, is issued under, or backed by, Eaton's $3 billion bridge facility that expires in January 2009 and is available to support acquisitions. The facility is required to be repaid by proceeds from the issuance of long-term debt and equity. Once Eaton finalizes its long-term funding related to the recent acquisitions, ongoing liquidity will be supported by existing long-term revolving bank facilities that total $1.5 billion. Fitch expects that $300 million of the bank facilities that mature in May 2008 would likely be renewed or replaced. Liquidity is further supported by Eaton's conservative debt structure. Debt maturities are well-dispersed with no more than $300 million - $325 million scheduled to be repaid in any single year.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Eric Ause, +1-312-606-2302, Chicago
Cheryl Peterson, +1-312-606-2309, Chicago
Media Relations:
Brian Bertsch, +1-212-908-0549, New York
