Joy Global (JOY) Ratings Cut to 'BB+' by S&P; Outlook Remains Negative

Standard & Poor's Ratings Services said that it has downgraded Joy Global Inc. (NYSE: JOY) to 'BB+' from 'BBB-'. The outlook is negative.

At the same time, we lowered our issue-level ratings on the company's senior unsecured debt to 'BB+' from 'BBB-' and assigned our '3' recovery rating. The '3' recovery rating reflects our expectation for meaningful (50%-70%; higher end of the range) recovery in the event of a payment default.

"The downgrade reflects our expectation that Joy's primary end market, the mining industry, will continue to face challenging conditions, particularly because low natural gas prices and regulatory pressure are contributing to a structural shift in demand away from thermal coal in the U.S.," said Standard & Poor's credit analyst Svetlana Olsha. The cyclical decline in the broader mining industry, due largely to a slowdown in China, has contributed to commodity oversupply conditions. Because of this, mining companies have reduced their capital expenditures and are continuing to defer equipment maintenance, which negatively affects Joy. Although we believe that Joy is gradually diversifying its business toward hard rock and other non-coal commodities (including copper, iron ore, and other industrial minerals) and focusing on new product development, the decline in its coal markets (U.S. coal was about 20% of its revenue as of the last 12 months ended Jan. 31, 2016) is creating strong headwinds. Therefore, we now view Joy's business risk profile as being on the lower end of our satisfactory range because of the weaker medium-to-long term prospects in its addressable markets.

We expect that Joy's credit measures will worsen in 2016 before slowly improving in 2017 and beyond. Our negative outlook on Joy reflects the risk that the company's end markets will continue to deteriorate next year or that its credit ratios will weaken by more than we expect over the next 12 months.

We could lower our ratings on Joy if lower commodity prices or weaker-than-expected macroeconomic conditions over the next 12 months diminish the prospects of a recovery in the mining industry. This could lead us to reassess Joy's business profile given its exposure to the mining end market. We could also lower our ratings on Joy if operating challenges cause its EBITDA margins to fall below 11% and remain there, which we consider to be below average profitability for a capital goods company, or if the company's debt-to-EBITDA metric increases above 4x and its FFO-to-debt ratio drops below 20% through 2017.

We could revise our outlook on Joy to stable if we expect that the company will improve its credit ratios and maintain a debt-to-EBITDA metric comfortably below 4x and a FFO-to-debt ratio of more than 20%. We would also need to believe that Joy's long-term business prospects remain intact, including relatively steady demand for the company's services business.

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