S&P Places Xylem (XYL) on Review for Downgrade

August 15, 2016 3:46 PM EDT

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S&P Global Ratings said that it has placed all of its ratings on Xylem Inc. (NYSE: XYL), including our 'BBB' corporate credit rating, on CreditWatch with negative implications.

"The CreditWatch placement follows Xylem's announcement earlier today that it will acquire Raleigh, N.C.-based Sensus U.S.A. Inc. from investment funds affiliated with The Jordan Co. and GS Capital Partners 2000," said S&P Global credit analyst Carissa Schreck. Sensus is a provider of smart meters, network technologies, and advanced data analytics for the water, electric, and gas industries. While still subject to regulatory approval, Xylem expects that the acquisition will close in the fourth quarter of 2016. The company intends to fund the $1.7 billion purchase with approximately $400 million of non U.S.-based cash, new and existing credit facilities, and a combination of short- and long-term debt. We believe that the transaction could cause Xylem's FFO-to-debt ratio to fall below 30% and its debt-to-EBITDA metric to increase above 3x, which would lead us to lower our corporate credit rating on the company. Xylem's ability to improve its metrics following the acquisition will depend on its operating prospects and the combined company's proposed capital structure and financial policies, which we intend to review in the next 90 days.

We expect to resolve the CreditWatch placement on Xylem in the next 90 days after we conduct our review. Our review will focus on Xylem's expected operating performance and growth strategies and the combined company's proposed capital structure and financial policies. If we expect that the company's credit measures will remain stretched-–including a FFO-to-debt ratio of less than 30%--we could lower our ratings, though we expect that any potential downgrade will be limited to one notch.

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