Moody's Places Parker-Hannifin (PH) Ratings on Review for Downgrade

Moody's Investors Service, Inc. placed the A3 senior unsecured debt rating of Parker-Hannifin Corporation (NYSE: PH) under review for downgrade and affirmed the company's P-2 short-term rating. The rating actions follow Parker's announcement that it has reached an agreement to acquire $1.4 billion (trailing sales) filtration company CLARCOR Inc. in a transaction valued at approximately $4.3 billion. The transaction is subject to customary regulatory and shareholder approvals and is expected to close around the middle of 2017 (roughly coinciding with Parker's fiscal year end 2017).

Moody's anticipates that a downgrade of the senior unsecured debt rating would likely be limited to one-notch, to Baa1, based on its expectation that (i) there will be a considerable cash component to the transaction, and (ii) the majority of Parker's domestic free cash flow will be applied to short-term and pre-payable debt that will comprise the bulk of remaining requisite funding to complete the transaction.

RATINGS RATIONALE

The announcement to acquire CLARCOR comes at a time when Parker's credit profile continues to face pressure from end markets that remain mired in a prolonged downturn, and while its balance sheet remains in a somewhat weakened state due to prior year debt-funded share repurchases.

The rating review will focus on the following: 1) the proposed financing and structure of the transaction, 2) the projected pace and magnitude of the combined entity's deleveraging path, 3) the prospects for both Parker and CLARCOR to revive sustainable organic revenue and earnings growth from their respective base businesses, and 4) the timing, scope and feasibility of realizing targeted merger synergies.

Parker's fiscal year ended June 2016 was the company's second consecutive year of lower revenues, with organic revenue growth down nearly 8% following flat organic growth in fiscal year 2015. Key end markets remain weak, saddled with lingering uncertainty that has translated into a pullback in both capital and operating expenditures. The company anticipates that market conditions will steadily improve in 2017, although visibility remains fairly limited. Even so, ongoing lean initiatives have enabled the company to be highly effective at maintaining margins, while also generating solid levels of free cash flow. The addition of CLARCOR, with its higher-margin, high aftermarket revenue streams, should bolster the relative resilience of Parker's business model and better position the combined company in the large and growing filtration market that is experiencing favorable, long-term fundamentals.

Moody's took the following rating actions on Parker-Hannifin Corporation:

Senior unsecured medium term notes at A3 placed under review for downgrade

Senior unsecured shelf at (P)A3 placed under review for downgrade

Short-term commercial paper rating of Prime-2 affirmed

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