Fitch Affirms SPX's Secured & Unsecured Ratings; Raises IDR to 'BB+'.
-- Issuer default rating (IDR) -- 'BB+';
-- Senior secured bank debt -- 'BB+';
-- Senior unsecured debt -- 'BB'.
The Rating Outlook is Stable. At March 31, 2006, SPX had approximately $866 million of debt outstanding.
The upgrade of SPX's issuer default rating recognizes SPX's progress in addressing its operating challenges, the implementation during the past year of a more conservative and disciplined operating strategy, and improved financial leverage. In February 2006, the company used its bank facilities to replace nearly all of its outstanding convertible liquid yield option notes (LYONs). As a result, SPX's outstanding debt consists primarily of secured bank debt. The facilities are secured by capital stock, but would become secured by substantially all assets if credit ratings on the facilities fall to certain levels. The rating for senior unsecured debt, which is one notch lower than the IDR, reflects weaker recovery prospects relative to secured debt in a distressed scenario.
Rating concerns include the impact of high raw material prices, weak cash flow, potential litigation liabilities, and uncertainty about SPX's long term operating profile as it continues to review its business portfolio. In addition, the company's competitive position will depend on its ability to realize benefits from programs initiated during 2005 to improve the company's performance with respect to productivity, cost controls, new product development and other operating issues.
Free cash flow will remain constrained through the remainder of 2006. However, Fitch anticipates that upside potential for the ratings could eventually be realized as the company further refines its operating strategy and demonstrates its ability to generate consistent cash flow. During the first quarter of 2006, SPX utilized its bank facilities to redeem nearly all $668 million of outstanding LYONs. Related to the transaction, SPX incurred liabilities for taxes and interest that will absorb most of its free cash flow in 2006. However, on a normalized basis when excluding these charges, the company expects to generate free cash flow (cash flow from operations, less capital expenditures) of $200 million. Fitch believes SPX can achieve a similar, or possibly higher, level of free cash flow in 2007 considering favorable demand trends in SPX's end-markets and positive first quarter performance. Risks to the ratings include unexpected weakness in SPX's industrial markets and unresolved litigation, including shareholder lawsuits initiated in 2004.
At March 31, 2006 SPX's liquidity included $364 million of unrestricted cash and $324 million of availability under its bank credit facilities that mature in 2010. Liquidity is reduced by $78 million of current debt. Total debt was $866 million at March 31 and included a $750 million bank term loan used to fund the recent payout of nearly all outstanding LYONs. SPX is currently within its targeted leverage range of 1.5 times (x)-2.0x gross debt/EBITDA. Leverage can be expected to increase toward the high end of this range as SPX continues to repurchase shares. The company spent $248 million in the first quarter to complete its previous share repurchase program and recently approved another program to repurchase 2.5 million shares that would have a value of roughly $125 million at the current share price.