S&P Revises Outlook on Joy Global (JOY) to Negative Amid Increased Leverage

Standard & Poor's Ratings Services said that it has affirmed its 'BBB' corporate credit rating on Joy Global (NYSE: JOY). The outlook is negative.

"The affirmation reflects our view that Joy will continue to generate moderate positive free cash flow despite the cyclical downturn in the mining industry, allowing the company to restore its credit measures to levels that support our current rating by 2017," said Standard & Poor's credit analyst Sarah Wyeth. "We also expect that Joy will adhere to a conservative financial policy and limit its acquisitions and shareholder-friendly activities." The negative outlook indicates the potential that we may lower our rating on the company if its credit measures weaken by more than we expect in 2015 and 2016--making the restoration of its credit measures in 2017 more difficult--because of continued weak demand for Joy's mining equipment. We now expect that the company's funds from operations (FFO)-to-debt ratio will fall slightly below 30% in 2015 and 2016. Still, the company should generate free cash flow of about $200 million in both years. The negative outlook also reflects the possibility that, over the longer-term, a prolonged secular decline in Joy's mining end markets could weaken its profitability and the scale and scope of its operations. We currently believe that the majority of this decline in demand for Joy's products is cyclical in nature and we assume that it will stabilize somewhat in 2017.

Our negative outlook on Joy reflects the risk that the company will be unable to restore its credit measures after being stretched in 2015 and 2016 due to weak demand in its mining end markets. We expect the company to improve its credit measures, specifically its FFO-to-debt ratio, to levels that are commensurate with our intermediate range by 2017; however, we believe that it could be challenging for the company to do so if a cyclical rebound does not occur before then. We also expect the company to maintain a conservative financial policy that supports its credit measures.

We could lower our rating on Joy if weaker-than-expected macroeconomic conditions and commodity prices for coal, iron ore, and copper depress the long-term demand for the company's equipment and cause its FFO-to-debt ratio to remain below 30% in 2017. We could also lower the rating if, over the longer-term, a prolonged secular decline in Joy's mining end markets continues to hurt its profitability and the scale and scope of its operations.

We could revise our outlook on Joy to stable if we expect that the company will restore and maintain a FFO-to-debt ratio of greater than 30% and we expect that its long-term prospects will improve, largely due to a cyclical rebound.

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