S&P Downgrades SPX Flow (FLOW) to 'BB-'; Outlook Negative
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S&P Global Ratings said that it has lowered its corporate credit rating on SPX Flow Inc. (NYSE: FLOW) to 'BB-' from 'BB'. The outlook is negative.
At the same time, we lowered our issue-level rating on the company's $600 million senior unsecured notes to 'BB-' from 'BB'. The '4' recovery rating remains unchanged, indicating our expectation for negligible (30%-50%; lower half the range) recovery in a default scenario.
"The downgrade reflects SPX FLOW's weaker-than-expected operating performance through the first three quarters of 2016," said S&P Global credit analyst Steven Mcdonald. "The rating action also incorporates our belief that the challenging conditions in the company's operating environment will likely persist over the next 12 months, limiting its ability to meaningfully improve its operating performance and strengthen its credit metrics."
The negative outlook on SPX FLOW reflects the potential that we may lower our rating on the company over the next 12 months given our expectation that its operating performance will remain under pressure due to the weakness in its key end markets (oil, mining, and dairy). We assume that the decline in the company's sales will moderate somewhat in 2017 and expect that its credit metrics will modestly improve, with a total debt-to-EBITDA metric recovering to the mid-4x area as its free cash flow turns positive.
We could lower our rating on SPX FLOW if the company is unable to improve the limited headroom under its consolidated debt leverage covenant to at least 15% (currently around 5%) by successfully amending its credit facility or obtaining a waiver for the covenant. We could also lower the rating if the company's operating performance deteriorates beyond our expectations, resulting in sustained leverage of more than 5x.
Although unlikely over the next 12 months given our expectation that its leverage will remain high, we could revise our outlook on SPX FLOW to stable if a quicker-than-expected rebound in its key end markets and/or management's cost-savings initiatives cause its profitability to improve significantly, resulting in sustained leverage of below 4x. In order to assign a stable outlook, the company would also need to restore the cushion under its debt leverage covenant to more than 15%.
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