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Rating Action:

MOODY'S ASSIGNS Ba2 RATINGS TO SPX CORPORATION'S INCREMENTAL SENIOR SECURED BANK CREDIT FACILITIES; Ba3 RATING TO ITS NEW SENIOR UNSECURED LYONS/ CONFIRMS EXISTING RATINGS

29 Jan 2001
MOODY'S ASSIGNS Ba2 RATINGS TO SPX CORPORATION'S INCREMENTAL SENIOR SECURED BANK CREDIT FACILITIES; Ba3 RATING TO ITS NEW SENIOR UNSECURED LYONS/ CONFIRMS EXISTING RATINGS

Approximately $2.3 Billion of Debt Obligations Affected.

New York, January 29, 2001 -- Moody's Investors Service assigned a Ba2 rating to SPX Corporation's ("SPX") new $300 million senior secured term loan C due December 2007. Moody's confirmed the Ba2 rating of SPX's increased $550 million senior secured revolving credit due September 2004. The new term loan C and an incremental $125 million revolving credit amount are being added via amendment and restatement of the existing credit agreement. Moody's additionally confirmed the Ba2 ratings of SPX's existing $500 million senior secured term loan A due September 2004, and existing $495 million senior secured term loan B due December 2006.

Moody's furthermore assigned a Ba3 rating to SPX's new $400 million of liquid yield option notes ("LYONs") due 2021, which are being offered in a private placement. These are original issue discount notes, which are senior unsecured obligations, convertible into a fixed number of SPX common shares based upon a premium to market at the time of pricing.

Moody's additionally confirmed SPX's Ba2 senior implied rating and Ba3 senior unsecured issuer rating. Also confirmed was the Ba2 rating of subsidiary General Signal's $25 million of remaining medium term notes due 2002. The ratings outlook is stable.

The ratings reflect SPX's approximately $950 million of available funds for acquisitions and other general corporate purposes upon closing the above transactions, through a combination of cash and unused revolving credit commitment. While SPX's decisions regarding growth through acquisition will be limited by the requirement for pro forma compliance with the banks' "Net Debt to EBITDA" leverage covenant of 3.50x in 2001 and 3.25x thereafter, Moody's is concerned that the company may have ample flexibility to potentially pursue an overly rapid and aggressive acquisition strategy involving a varied group of businesses. While SPX has effectively lowered its weighted average cost of capital in conjunction with the above transactions, there remains a risk that the considerable funds availability generated may be invested in acquisitions which fail to produce management's expected returns. While SPX has demonstrated a strong track record with its rapid growth strategy since the current management team came on board in 1995, Moody's believes that the challenges of integration, operating performance improvement and organic growth will be intensified as the economy weakens and the absolute size and diversity of the company expand. SPX's leverage is high for its rating category, particularly during periods following significant acquisitions. Interest coverage is adequate on an "EBITA/Cash Interest" basis, but low for the company's rating category on an "EBITDA-CapEx/Cash Interest" basis since capital expenditures levels have been running at about twice depreciation. Management has indicated that this investment level is expected to decelerate, as projects are completed for certain of the businesses that were acquired from General Signal (assuming the absence of any capital-intensive acquisitions). The company's balance sheet is weak, with goodwill equal to 39% of total assets (due to the rapid series of acquisitions) and negative $530 million of tangible equity. The negative tangible equity is notably largely attributable to the accounting for the General Signal acquisition in 1998, which required that the $780 million cash portion of the purchase price to be recorded as a dividend. Approximately 25% of SPX's business remains automotive-related, causing the company to remain relatively vulnerable to the significant downturns that are becoming evident in that market. SPX operates in many competitive and fragmented markets, but looks to offset these risks by investing in proprietary technologies whenever possible. While SPX does not have a history of paying dividends, the company does effect frequent stock buybacks as a tool to manage its cost of capital.

However, the ratings also reflect SPX's impressive restructuring and integration of General Signal, which was acquired in October 1998 and had substantially higher revenues than did SPX at that time. The company has continued to further reduce leverage and strengthen cash flow from operations subsequent to the approximately 20 additional bolt-on acquisitions that have followed. SPX has exceeded its commitments to its bank group to reduce debt. "Total Debt/EBITDA" was reduced from 4.4x in June 1998 to 2.5x in December 2000, and would have demonstrated even more improvement in the absence of stock buybacks. SPX's management attributes much of the company's success to the fact that its operations and compensation policy are based on Economic Value Added ("EVA") management techniques. Management believes that EVA has been a key factor in focusing SPX's employee base on increasing value and cash flow by growing the business, improving efficiency and enhancing returns on existing capital, or by eliminating businesses that offer little promise. SPX's acquisition strategy has fulfilled management's objectives of materially reducing the company's relative automotive exposure, as well as of limiting significant exposure to any other specific business lines. The restructuring programs following significant acquisitions have demonstrated an average one-year cash payback. SPX has substantial value embedded in its INRANGE Technologies subsidiary, which was partially sold to the public in September 2000 and currently has a market capitalization exceeding $3 billion. SPX realized $128 million in net proceeds from the IPO, and continues to retain about 90% of INRANGE's economic value and 98% of INRANGE's voting control. INRANGE, which was acquired as part of the General Signal acquisition, is a designer, manufacturer, marketer and servicer of networking and switching products for storage, data and telecommunications networks. This subsidiary is anticipated to have limited exposure to potential near-term economic downturns and budget cuts for information technology. During 1999 and 2000, SPX has been successful at generating 5%-7% in overall organic growth, but this trend may be difficult to maintain across business lines in an economic downturn. SPX does not have any material off-balance sheet obligations and has the ability to divest of niche businesses when prudent. Were the company to curtail all acquisitions, management projects that all outstanding debt would be repaid ahead of schedule.

The stable outlook reflects the historical evidence that SPX is being managed by a strong management team with an effective operating philosophy, offset by Moody's concerns that the company's acquisition strategy may be too aggressive; that SPX's portfolio of businesses may be too diverse, and that an economic downturn may negatively affect cash flow in excess of pro forma estimates.

The Ba2 rating on the $1.845 billion in senior bank credit facilities reflects the benefits and limitations of the collateral package. SPX and its significant subsidiaries have provided secured guarantees, including a perfected first priority security interest in all tangible and intangible assets of the company and its domestic direct and indirect subsidiaries. Stock pledges have also been provided by SPX's direct and indirect domestic subsidiaries, and by first-tier foreign subsidiaries for 66% of their stock. The collateral secures the General Signal medium term notes and remaining IRB's on an equal and ratable basis. The amendment of the existing facilities required only a 51% vote, as it did not represent a material change in terms or an effective re-syndication of the debt. Participation in the new facilities was voluntary. One of the most notable changes in covenant terms is that "net debt" (total debt less cash exceeding $50 million) may be utilized in the calculations, which will become a significant factor once SPX draws down the LYONs and new term loan C. Additionally, the mandatory prepayment for the net proceeds from the issuance of the $400 million in LYONs notes was waived by the bank group.

The Ba3 rating on the $400 million in privately-placed LYONs reflects their status as senior unsecured notes. They are zero coupon bonds with a yield to maturity of 2.0% and an accreted issue price of $595 million after 20 years. The LYONs are convertible to stock at a 20% premium and a 5.3689 conversion ratio. The LYON's are redeemable by the issuer in cash, stock or a combination thereof, after five years and at no premium. Investors hold put options to redeem their interests after years three, five and ten. Cash payments are restricted by the terms of the bank credit agreement. The LYON's are subject to only a change of control covenant.

SPX estimates pro forma December 31, 2000 total debt of $1,758 million and net debt of roughly $1,350 million, incorporating the impact of the proposed financing transactions. Notably, zero usage is assumed under SPX's expanded $550 million bank revolving credit facility. LTM pro forma leverage is high for SPX's rating category, with "Total Debt/ EBITDA" of 3.3x and "Net Debt/EBITDA" of 2.6x. For reasons highlighted above, pro forma interest coverage is adequate, with "EBITA/Cash Interest" of approximately 4.0x, but with lower "(EBITDA-CapEx)/Cash Interest" of approximately 3.5x. Pro forma "(EBITDA-CapEx)/Net Cash Interest", allowing 5% interest income credit for $400 million in cash on the balance sheet, was approximately 4.4x. SPX notably has certain interest rate swaps in place which are not factored into these pro forma calculations. SPX is highly levered on a pro forma book basis, with "Total Debt/Book Capitalization of 74%. As detailed above, this is largely attributable to merger accounting requirements for the General Signal acquisition. Pro forma "Total Debt/Market Capitalization" of 33% highlights that the market perceives significant additional intrinsic value over book levels. SPX's pro forma consolidated EBITA ROA is marginal at approximately 12.6%, but with appreciably higher returns being posted by the growing Industrial Products and Technical Services divisions.

SPX Corporation, headquartered in Muskegon, Michigan, is a global provider of technical products and systems, industrial products and services, service solutions and vehicle components. Annual revenues are approximately $2.7 billion.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Lisa B. Matalon
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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