Fitch Ratings has upgraded Devon Energy Corporation's (Devon) (NYSE DVN) long-term Issuer Default Rating (IDR) and senior unsecured debt ratings to 'BBB+' from 'BBB'. Additionally, Fitch has affirmed the company's short-term IDR and commercial paper ratings at 'F2'. The Rating Outlook for Devon is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrade is driven by debt reduction that has occurred since the acquisition of GeoSouthern Energy Corporation in February of this year. Effectively, Devon has quickly returned credit metrics to previous levels prior to the primarily debt financed acquisition of GeoSouthern. Net proceeds from assets sales in the second and third quarter totaled approximately $4.5 billion after tax and have been used to reduce debt balances.
Devon's ratings reflect its large proven reserve base in North America, sizeable production levels balanced between liquids and natural gas and conservative financial policies. Fitch estimates that proven reserves currently total approximately 2.8 billion barrel of oil equivalent (boe) over multiple basins with over 60% of these reserves developed. Fitch expects 2015 production to average somewhere between 660,000 and 700,000 boe per day with 60% of the production being liquids. Balance sheet debt - post-redemption of $1.9 billion in senior notes due 2016 & 2017 - should be approximately $10 billion inclusive of approximately $1.7 billion in EnLink debt that is non-recourse to Devon. The redemption of Devon's senior notes due 2016 and 2017 is expected to occur on Nov. 13. After this occurs, Fitch estimated gross E&P debt to proven reserves and daily production should approximate $3/boe and $13,000 per boe per day, respectively.
With the acquisition of liquids focused GeoSouthern and divestures of certain natural gas assets, Devon's portfolio re-balancing is complete. The company's production mix the fourth quarter is estimated to be approximately 37% oil, 20% natural gas liquids (NGLs) and 43% natural gas. Oil production will likely grow more than 20% in 2015 primarily a result of operations in the Eagle Ford, Permian Basin and in Canada (Jackfish 3). Devon has hedged a majority of its oil production for 2015 at above current market prices. Natural gas production is primarily focused in the Barnett Shale which still accounts for approximately a third of the firm's overall production from a geographic prospective.
Free Cash Flow (FCF) & Expectations
Fitch believes that Devon will experience favorable cash flow trends given its liquids focused production mix, growth targets and completion of Jackfish 3. Further, Fitch expects Devon to balance its capital spending and dividends with internally generated cash flow and be FCF neutral to positive on a go forward basis. Consolidated debt/EBITDA is expected to be less than 1.5x in 2015.
Liquidity is provided primarily by cash flow from operations, the company's undrawn $3 billion unsecured revolver due 2018 and its commercial paper program. Additionally, Fitch estimates Devon possesses approximately $1.7 billion in cash that is held outside the U.S. The company's revolver has only one material covenant which is a 65% maximum funded debt to capitalization. As of June 30, 2014, Devon's funded debt to capitalization was 23.4%. After the redemption of the senior notes on Nov. 13, maturities are $500 million of floating rate notes (FRNs) due December 2015, $350 million of FRNs due December 2016, $125 million in senior notes due July 2018 and $750 in senior notes million due December 2018.
Negative: Future developments that could, individually or collectively, lead to negative rating action include:
--Material and sustained negative free cash flow that results in higher leverage;
--Levered share repurchases or major dividend increases;
--Material disappointments in reserve replacement or production levels.
Positive: Future developments that could, individually or collectively, lead to positive rating actions include:
--E&P debt/PD below $4.50 and debt/production below 12,000 boe/d on a sustained basis;
--Consistent strong reserve replacement with competitive finding and development costs;
--Demonstrating positive or neutral free cash flow after capex and dividends on a sustained basis.
Fitch has upgraded Devon as follows:
Devon Energy Corporation
--Long-term IDR to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB;
--Senior unsecured credit facility to 'BBB+' from 'BBB.
Devon Financing Corporation U.L.C.
--Long-term IDR to 'BBB+' from 'BBB' and withdrawn;
--Senior unsecured notes to 'BBB+' from 'BBB'.
--Long-term IDR to 'BBB 'from 'BBB-';
--Senior unsecured notes to 'BBB' from 'BBB-'.
Fitch has affirmed the following ratings:
Devon Energy Corporation
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Rating Outlooks for Devon and Ocean are Stable.
Moody's Investors Service affirmed its ratings for Lockheed Martin (NYSE: LMT) and subsidiaries ("Lockheed Martin"), including the Baa1 senior unsecured and P-2 short-term debt ratings, and revised the rating outlook to Positive from Stable.
The change in the rating outlook to a positive bias reflects Moody's expectation that Lockheed Martin's credit profile will improve over the forward rating horizon, as the company benefits from (i) a comparatively protected position as the prime contractor on one of the few growing defense programs—the F-35 Lightning II—and Moody's view that the risk profile of that program has reduced, and (ii) a growing amount of cash flow likely over time related to the recovery of previously funded pension expenses from its principal government customer, another key differentiating factor in the broader context of its immediate peer group. Combined with anticipated strong execution as recently demonstrated on major programs and a measured approach to shareholder return initiatives, the prospect of an upgrade in the company's long-term senior unsecured debt rating to A3 being warranted over the coming 12-to-18 months is subsequently deemed to be elevated, as reflected in the rating outlook revision to Positive.
"As the largest US defense contractor, Lockheed Martin's leadership position across multiple mission area categories—including air, space, sea, and missile defense—continues to mitigate budget-driven earnings volatility which has been more notably evidenced by other contractors in the defense industry sector" said Russell Solomon, Moody's Senior Vice President and lead analyst for the company. "The company's continued strength in execution on key programs coupled with our expectation of now only modestly deteriorating defense end market fundamentals and increasing recovery of previously funded pension contributions over the forward rating horizon lend support to the positive outlook," Solomon added.
SUMMARY RATING RATIONALE
Lockheed Martin's Baa1 rating is broadly supported by: 1) the company's significant scale as the world's largest defense contractor, with about $45 billion of revenue this year, and as the leading IT provider for the US government; 2) the breadth and depth of its operations and strong market positions as the incumbent on a number of critical defense programs; 3) considerable barriers to entry given the high-technology nature of the industry and the classified status of many operations and programs; and 4) the benefits of good visibility afforded by the largest order book amongst defense contractor peers (nearly $77 billion as of September 2014). We expect modestly declining sales will stabilize in 2015 at about $44 billion and grow by about 3%-5% in 2016, as near-term revenues are likely to remain somewhat pressured by persistent budgetary constraints for Lockheed Martin's principal customer, the US Department of Defense (DoD). Even so, we expect this pressure will continue to be less severe for the company than for the broader defense market given its prime position on the sizeable and growing F-35 program. The risk profile on the F-35 program has reduced considerably in our view. While it remains exposed to further quantity reductions and affordability initiatives, the program now seems reasonably assured to continue, and at accelerating unit delivery levels, with renewed interest from global allies as cost reduction initiatives are increasingly scrutinized. Notably, even as annual revenues have declined nearly 4% from the 2012 peak, Lockheed Martin has generally maintained reported operating margins in excess of 9%. As a result, even with US defense spending under continued pressure we expect Lockheed Martin will comfortably generate at least $3 billion of free cash flow annually over the next several years, affording it the opportunity to both further strengthen the financial profile and still maintain sufficient flexibility to meet its shareholder return objectives.
Pension obligations remain substantial and were about $9.8 billion as of the 2014 mid-year pension remeasurement, notwithstanding some meaningful contributions exceeding minimum requisite funding levels, significant relief in the underfunded status stemming from rising interest (and ensuing discount) rates in 2013, and the company's second quarter announcement that it would freeze its salaried defined benefit pension plan in two stages (beginning January 2016 and concluding January 2020). Adjustments for the debt-like pension program shortfalls continue to adversely affect Lockheed Martin's debt metrics at more meaningful levels than for similarly rated peers, with pension adjustments representing more than one-half of the roughly $17 billion in Moody's adjusted debt for the company. This proportion is still much improved from about 65% at the end of 2012. And while rapidly growing pension expense recoveries from Lockheed Martin's principal government customer (the US DoD) related to historical outlays are expected to represent a meaningful cash flow differentiator for the company over the next few years, we remain watchful that higher costs embedded in the company's overhead rates may adversely affect its ability to price competitively on future bid activities.
The rating outlook is positive, incorporating expectations that Lockheed Martin will sustain a solid financial profile over the intermediate term and execute profitably on its long-lived programs such that leverage continues to improve and trend towards 2.0x, all while a strong liquidity profile is maintained. While pressure on defense budgets is expected to persist, Lockheed Martin appears to be better positioned than most companies in the industry to preserve its top line and maintain a strong earnings profile as the leading global defense contractor with the prime position on the largest and most important contract.
WHAT COULD CHANGE THE RATING - UP
Sustained operating margins that exceed 10% coupled with evidence of continued deleveraging (trending towards 2.0x Debt-to-EBITDA) and broad-based improvement in other key credit metrics, concurrent with maintenance of a strong liquidity profile, could warrant consideration for a potential upward rating action. Further reduction (either organically or inorganically) of the large underfunded pension obligation continues to be a primary opportunity to strengthen the balance sheet in support of a prospectively higher rating.
WHAT COULD CHANGE THE RATING - DOWN
The outlook and/or rating could be pressured if execution problems (particularly with the F-35 program) lead to material contract cancellations and profitability falls more than anticipated, declining leverage trends reverse (approaching 3.0x Debt-to-EBITDA) and/or fiscal policies become more aggressive (including shareholder remuneration in excess of free cash flow) and the company's liquidity profile worsens.
The principal methodology used in these ratings was the Global Aerospace and Defense Industry Methodology published in April 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
Fitch Ratings has affirmed Whirlpool Corporation's (NYSE: WHR) ratings, including the company's Issuer Default Rating (IDR), at 'BBB'. The Rating Outlook is Stable.
Fitch placed Whirlpool's ratings on Rating Watch Negative in July 2014 following the company's announcement that it has entered into binding agreements to acquire a majority interest in Indesit Company S.p.A. (Indesit) for approximately EUR758 million or $957 million (based on the exchange rate as of Sept. 30, 2014).
In July 2014, Whirlpool entered into the following binding agreements:
--Share repurchase agreement to acquire Fineldo S.p.A.'s stake in Indesit, representing about 42.7% ownership;
--Share repurchase agreement with certain members of the Merloni family for a 13.2% stake in Indesit;
--Share repurchase agreement with Ms. Claudia Merloni for a 4.4% stake in Indesit.
On July 17, 2014, Whirlpool completed the purchase of 4.4% of Indesit shares from Ms. Claudia Merloni. On Oct. 14, 2014, Whirlpool completed the acquisition of 42.7% of Indesit shares held by Fineldo S.p.A. and 13.2% of Indesit shares held by certain members of the Merloni family.
The company now has 60.4% ownership of Indesit, representing a 66.8% voting stock in the company (including the treasury shares held by Indesit).
Whirlpool will now commence the steps to launch a mandatory tender offer for the remainder of Indesit's outstanding shares, with the intention to delist the company. The tender offer purchase price per share is equal to about $13.89 per share (based on the exchange rate as of Sept. 30, 2014). The company expects to complete the tender offer no later than the first quarter of 2015.
INDESIT ACQUISITION AND RATIONALE
Founded in 1930, Indesit is one of the leading European manufacturers and distributors of major appliances. Indesit has eight industrial sites (in Italy, Poland, the United Kingdom, Russia and Turkey) and approximately 16,000 employees.
During fiscal 2013, Indesit had sales of EUR2.67 billion and EBITDA of approximately EUR178.5 million. The company generated about 56% of revenues from Western Europe, 38% from Eastern Europe and 6% from non-European markets.
The proposed acquisition has good strategic rationale for Whirlpool. Indesit provides Whirlpool with a broader platform to expand its operations in Europe. Currently, about 16% of Whirlpool's revenues are generated from this region. On a pro forma basis (including Indesit), sales from Europe, Middle East and Africa will represent about 29% of Whirlpool's worldwide sales.
Appliance demand in Europe remains relatively weak. Whirlpool's sales in the EMEA region grew 4.8% during the first half of 2014 (1H'14) compared with 1H'13 but the 1H'14 sales are still 15.2% below the 1H'07 sales level. Indesit's revenues for the 1H'14 were 5.1% lower compared with 1H'13 sales, due to lower volumes and the negative effect of foreign currency translation, offset in part by positive price/mix. Fitch currently expects appliance sales in Europe will be flat to slightly higher in 2014 compared with 2013.
IMPACT ON RATINGS
While Fitch views the transaction as strategically positive for Whirlpool, the acquisition will meaningfully increase the company's debt and leverage levels. At the same time, Whirlpool also expects to close the acquisition of a 51% equity stake in Hefei Rongshida Sanyo Electric Co., Ltd. (Hefei) for an aggregate purchase price of RMB3.4 billion (approximately $547 million as of June 30, 2014).
In June 2014 (prior to the announcement of the Indesit acquisition), Fitch affirmed Whirlpool's IDR at 'BBB' and revised the Outlook to Positive from Stable with the expectation that the company's credit metrics continue to improve, including debt to EBITDA situating in the 1.0x-1.5x range and interest coverage consistently above 10x. An upgrade of Whirlpool's ratings to 'BBB+' in the next 12 months is now unlikely.
The rating affirmation and Stable Outlook reflects Fitch's expectation that debt to EBITDA will settle at around 1.5x - 2.0x and interest coverage will be above 9.0x within 12-24 months following the completion of the acquisitions of Indesit and Hefei.
Fitch now estimates that the company's debt to EBITDA will approximate 2.0x and funds from operations (FFO) adjusted leverage will be 3.5x by year-end 2015. Interest coverage is projected to be approximately 10.0x at the conclusion of 2015.
Fitch expects the company will reduce leverage in 2016, with debt to EBITDA projected to be about 1.5x, FFO adjusted leverage situating at 3.0x and interest coverage above 10.0x at the end of 2016.
While Fitch does not expect a global economic downturn during the next 12 months, the company's risk profile is somewhat heightened by the significant debt incurred for the acquisition of Indesit as well as the pending acquisition of a 51% equity stake in Hefei. Negative rating actions may be considered if there is significant deterioration in global demand and consequently the company's operating performance, Whirlpool undertakes shareholder friendly activities funded by debt, and/or there is material judgment against the company related to existing regulatory proceedings, leading to leverage levels consistently exceeding 2.5x and interest coverage falling below 5.5x.
While unlikely in the next 12 months, positive rating actions may be considered if the company's financial performance is meaningfully better than Fitch's base case forecast, particularly debt-to-EBITDA consistently situating within a range of 1.0x - 1.5x and interest coverage sustaining above 10x, as Whirlpool continues to maintain a solid liquidity position.
Fitch has affirms the following ratings with a Stable Outlook:
--Long-term IDR at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--Senior unsecured notes at 'BBB';
--Bank revolving credit facility at 'BBB'.
--Long-term IDR at 'BBB';
--Senior unsecured notes at 'BBB'.
Whirlpool Finance B.V.
--Short-term IDR at 'F2';
--Commercial paper (CP) at 'F2'.
Standard & Poor's Ratings Services lowered its long-term issuer credit rating to 'B' from 'B+' on OCWEN Financial Corp. (NYSE: OCN). The outlook is negative. In addition, we lowered our ratings to 'B' from 'B+' on OCWEN's senior secured debt and to 'B-' from 'B' on its senior unsecured debt.
"The rating action reflects our view of increasing regulatory scrutiny over the company's servicing practices and today's announcement that the company erroneously dated correspondence to some borrowers who were facing foreclosure," said Standard & Poor's credit analyst Stephen Lynch. "We believe the culmination of events and ongoing investigations will limit the company's ability to acquire servicing assets," Mr. Lynch added.
Standard & Poor's Ratings Services affirmed all of its ratings on AbbVie Inc. (NYSE: ABBV), including the 'A' corporate credit rating. We removed the corporate credit rating and the unsecured rating from CreditWatch with negative implications, where we placed them on July 18, 2014. The outlook is stable.
The removal from CreditWatch and stable outlook reflect the absence of the leveraged acquisition of Shire plc (Nasdaq: SHPG) and our belief that AbbVie will maintain a conservative financial policy with leverage sustained below 1.5x.
"AbbVie's financial risk profile reflects leverage of 1.2x and funds from operations (FFO) to total debt of 78% as of June 30, 2014. Absent Shire, we believe AbbVie will maintain a conservative financial policy and keep financial metrics consistent with "minimal" financial risk (leverage less than 1.5x)," said credit analyst Michael Berrian. "Although management announced a 16.7% increase in its dividend, and the Board authorized a $5 billion share repurchase program, we believe these actions are consistent with AbbVie's financial policy and do not impair financial risk. Moreover, it signals a more conservative position from the aggressiveness exhibited by its attempted Shire acquisition. We continue to view management and governance as fair, given the absence of tenure as a stand-alone company."
Our stable outlook reflects AbbVie's steady operating performance and good cash flows, offset by our belief that a commitment to shareholder returns will remain elevated.
We could lower the rating if the company's leverage increases to more than 2x on a sustained basis. This would most likely occur through the pursuit of very aggressive shareholder returns, with greater than anticipated debt-financed acquisitions or share repurchases. Although less likely, this would occur because of significant challenges to Humira's market position.
We could consider an upgrade once the company is less dependent on Humira and/or our perception of management and governance becomes stronger. This would prompt reconsideration of the management and governance and comparable rating analysis modifiers.
More Credit RatingsView Older Stories
S&P Affirms Ratings on Tesoro Logistics L.P (TLLP); Rates Proposed Notes Offering at 'BB'
S&P Raises Outlook on QEP Resources (QEP) to Stable; Ratings Affirmed at 'BB+'
AECOM Technology (ACM) Assigned 'BB' Rating by S&P Following URS Acquisition
Moody's Weighs Positives, Negatives of CBS Corp.'s (CBS) New Digitial Subscription Service
Moody's Revises Outlook on Texas Health Resources to Developing Following Ebola-Related Situations
Moody's Cuts Walgreens (WAG) Unsecured Rating to 'Baa2'; Sees Elevated Debt-to-EBITDA
S&P Raises Outlook on Chesapeake Energy (CHK) to Positive Following Asset Sale
S&P Raises Interface (TILE) to 'BB+'; Industry Fundamentals Improving
Fitch Comments on Citigroup's (C) Q3 Results; Revs, Profits Bolstered by Citi Holdings
S&P Upgrades GEO Group (GEO) to 'BB-'; Expected to Sustain Robust FCF Levels
Fitch Comments on Reconstituted Darden (DRI) Board; New Slate Removes Some Uncertainty
Moody's Cuts Darden Restaurants' (DRI) Senior, Unsecured Ratings to Junk
S&P Assigns 'BB-' L-T, 'B' S-T Rating to Fiat Chrysler Automobiles (FCAU)
S&P Places Atlas Pipeline Partners (APL) on CreditWatch Negative
S&P Lowers Financial Risk Profile on Methanex Corp (MEOH) to Intermediate
S&P Raises Outlook on Headwaters (HW) to Positive; Housing Market Continues Improving
S&P Pplaces Constellium N.V. (CSTM) on CreditWatch Negative
S&P Upgrades CyrusOne (CONE) to 'B+'; Revenue Growth has Improved; Churn Down
S&P Affirms Ratings on Magnum Hunter Resources (MHR); Rates New $340M Secured Term Loan at 'B'
Symantec (SYMC) Ratings Placed on CreditWatch Negative by S&P
S&P Shifts Outlook on Chiquita Brands (CQB) to Developing; Rating Depends on Shareholder Vote for Merger/Sale
General Cable (BGC) Placed on CreditWatch Negative by S&P
S&P Raises Outlook on Selective Insurance (SIGI) to Positive; Notes Organic Growth in Capital Adequacy
Moody's Cuts Crown Holdings (CCK) to 'Ba2'; Concludes Review Following Move to Acquire EMPAQUE
UPDATE: S&P Cuts Cliffs Natural Resources (CLF) to Junk
UPDATE: S&P Cuts Cliffs Natural Resources (CLF) to Junk
Actavis' (ACT) Move to Acquire Durata (DRTX) is Strategically Sound; Signals Appetite for More M&A - Moody's
S&P Says JCPenney (JCP), Sears (SHLD) Paths to Recovery are Diverging
Covidien plc (COV) Remains on CreditWatch Positive at S&P (MDT)
Campbell Soup (CPB) Ratings Cut to 'A3' by Moody's
S&P Lifts Outlook on Accuride (ACW) to Stable
Carefusion (CFN) Ratings Affirmed at Moody's Following Becton Dickinson (BDX) Deal
S&P Places Becton Dickinson (BDX) on CreditWatch Negative Following Plans to Acquire CareFusion (CFN)
Och-Ziff Capital's (OZM) IDR Rated 'BBB-' by Fitch; Outlook Stable
Hewlett-Packard (HPQ) Placed on CreditWatch Negative by S&P
Salix Pharma's (SLXP) Termination of Cosmo Tech Merger is Credit-Positive Development - Moody's
Quicksilver Resources (KWK) Cut to 'CCC-' by S&P
S&P Places IAMGOLD Corp. (IAG) on CreditWatch Negative
S&P Lowers Outlook on Murphy Oil (MUR) to Negative; Ramp Up in Production Needed
S&P Keeps Medtronic (MDT) on CreditWatch Negative on Planning Covidien (COV) Deal
S&P Assigns 'BBB-' Issuer Rating to Hercules Technology Growth Capital (HTGC)
Southwest Gas (SWX) Ratings Lowered to 'BBB+' by S&P
RCS Capital (RCAP) Ratings Affirmed by Moody's
Increase in Mesh Litigation Reserves is Credit Negative for Endo Int'l (ENDP) - Moody's
U.S. Silica (SLCA) CFR Raised to 'Ba2' by Moody's
Enterprise Products Partners (EPD) Ratings Affirmed by S&P
Moody's Affirms Unsecured Ratings of Energizer Holdings (ENR) Following Review for Downgrade
Freeport-McMoran (FCX) Outlook Raised to Stable by S&P; Sees Steady Operating Performance Over Next 24 Months
eBay (EBAY) Credit Ratings Outlook Moved to Watch Negative at S&P
Morningstar Cuts PIMCO Total Return to Bronze on Gross Departure