S&P Raises EnerSys (ENS) to 'BB+'; Operating Prospects Good, Leverage Expected to Remain Firm

Standard & Poor's Ratings Services raised its ratings on industrial battery manufacturer EnerSys (NYSE: ENS), including the corporate credit rating to 'BB+' from 'BB'. The outlook on the corporate credit rating is stable.

At the same time, we raised our issue-level rating on the company's recently upsized $650 million first-lien credit facilities to 'BBB' from 'BBB-'. The '1' recovery rating remains unchanged, indicating our expectation for very high recovery (90%-100%) in a payment default scenario. The first-lien credit facilities consist of a $500 million revolving credit facility due 2018 and a $150 million term loan due 2018.

We also raised our issue-level rating on the company's senior unsecured convertible notes due 2038 to 'BB+' from 'BB'. The '3' recovery rating remains unchanged, indicating our expectation for meaningful recovery (50%-70%) in a payment default scenario.

The upgrade reflects EnerSys' good operating prospects and our expectation that the company will maintain debt-to-EBITDA leverage in the 1.5x to 2.0x range and funds from operations (FFO) to debt in the 45% to 60% range while it continues to pursue debt-financed acquisitions and shareholder return activities. "EnerSys has demonstrated a disciplined approach to debt-funded activities, and has increased its capacity for medium and large debt-funded acquisitions and shareholder return activities," said Standard & Poor's credit analyst Sol Samson.

EnerSys manufactures, markets, and distributes reserve-power batteries (for telecom, computer back-up, and aerospace and defense applications) and motive-power batteries (primarily for electric forklifts). Its global market shares in these two areas are roughly 16% and 35%, respectively. Demand from EnerSys' core customers tends to be cyclical, as demonstrated by its performance during the last recession, when revenues fell by about 30%. These factors, along with the company's good geographic diversity, support Standard & Poor's business risk profile assessment of "fair." We believe EnerSys will maintain good market shares in the global industrial battery market, which is cyclical, competitive, and exposed to volatile lead costs. The company should continue to benefit from relatively stable aftermarket revenues and to mitigate raw material cost increases through higher prices, though there can be a lag.

We believe EnerSys will maintain credit ratios consistent with our "modest" financial risk profile. Current credit ratios are well superior to the "modest" range but are likely to drop as the company employs debt in addition to its free cash flow to fund growth initiatives and shareholder returns. As of June 29, 2014, the company's debt to EBITDA was less than 1x and its FFO to debt was about 100%. We do not expect these measures to deteriorate to more than 2x or less than 45%, respectively, notwithstanding our assumptions of substantial acquisitions and share repurchases.

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