S&P Upgrades Allergan (AGN) to 'BBB-'; Outlook Stable

S&P Global Ratings said it raised its corporate credit rating on security products manufacturer Allegion plc (NYSE: AGN) to 'BBB-' from 'BB+'. The outlook is stable.

At the same time, consistent with our issue-level rating methodology for investment-grade issuers, we raised the rating on the company's $300 million 5.75% senior unsecured notes due 2021 and $300 million 5.875% senior notes due 2023 to 'BBB-' from 'BB+'. In addition, we lowered the issue-level ratings on the company's $500 million bank revolving credit and $975 million term loan, both due Oct. 15, 2020, to 'BBB-' from 'BBB'.

"The stable outlook reflects our expectation that Allegion will reduce debt-to-EBITDA leverage to 3x or below by the end of 2016 and will maintain debt leverage in a fairly narrow range between 2.75x and 3.25x over the next two years, with leverage at the higher end of that range immediately after modest sized bolt-on acquisitions," said S&P Global Ratings credit analyst Thomas Nadramia. "We also expect Allegion will maintain interest coverage of about 8x or higher."

We do not view an upgrade to 'BBB' as likely in the next two years because this would require that either Allegion maintain debt leverage of 2x or lower (in the modest category) or we reassess the company's business risk as strong, which could occur if Allegion grew substantially larger through acquisitions and/or diversified its business by expanding its product lines beyond residential and commercial security items, all while maintaining its low volatility of earnings through business cycles.

Based on our outlook for improving residential, commercial, and multifamily construction markets in the U.S. (which fuels growth in residential locksets and security products), we view a downgrade as unlikely over the next two years. However, we could consider a negative rating action if Allegion pursues a more aggressive than expected acquisition or share repurchase strategy that results in additional borrowings, causing sustained debt leverage of greater than 3.75x and interest coverage of below 6x.

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