MOODY'S CONFIRMS Aa2 LONG TERM DEBT RATINGS OF ABB; LEAVES THE Ba1 RATINGS FOR SENIOR SECURED DEBT OF ELSAG BAILEY ON REVIEW FOR UPGRADE; THE LATTER RATINGS WILL BE WITHDRAWN UPON CONSUMMATION OF THE ACQUISITION
Moody's Investors Service has confirmed the Aa2 senior debt ratings of ABB Asea Brown Boveri Ltd (ABB) reflecting Moody's expectation that ABB's management will quickly integrate Elsag Bailey Process Automation N.V. (Elsag Bailey), once the necessary approvals are obtained, and it will realize a large part of the targeted synergistic cost savings. However, the confirmation reflects Moody's expectation that the Elsag Bailey transaction was opportunistic, and that ABB will not expand further through similar large-scale, debt-financed acquisitions in the near-term. The Ba1 senior secured bank facility ratings, and "ba3" rating for the Trust Originated Preferred Securities (TOPRs) of Elsag Bailey remain on review for possible upgrade. Moody's will withdraw the ratings once the TOPRs have been tendered and the credit facility has been refinanced by ABB. Any debt, which remains outstanding after closing will be upgraded to a level reflecting Elsag Bailey's membership to the ABB group. The Prime-1 rating for short term debt of ABB was confirmed. This rating action concludes a review that was initiated on October 15, 1998.
Ratings confirmed are:
ABB Asea Brown Boveri Ltd -- Aa2 issuer rating and for senior Eurobonds and EMTNs;
ABB Capital B.V. -- Aa2 for EMTNs supported by ABB Asea Brown Boveri Ltd.;
ABB Finance Inc. -- Aa2 for Euronotes supported by ABB Asea Brown Boveri Ltd.;
ABB Intl. Finance N.V. -- Aa2 for Euronotes and -bonds supported by ABB Asea Brown Boveri Ltd.;
ABB Special Finance Corp. -- "aa2" for preference shares supported by ABB Asea Brown Boveri Ltd.;
ABB Treasury Centre Australia Ltd. -- Aa2 for medium-term promissory notes supported by ABB Asea Brown Boveri Ltd.,
Elsag Bailey Process Automation N.V. -- Ba1 for senior secured bank facilities and "ba3" for TOPRs.
Elsag Bailey represents a good strategic fit, regionally and product-wise, for ABB's industrial automation business. Technologically, Elsag Bailey strength lies in instrumentation like temperature, pressure and flow control and general analytics, areas of relative weakness of ABB's industrial business. Geographically, Elsag Bailey adds the US, Japanese, German, French, and Italian markets to ABB's core regions Northern Europe, Australasia, and South America. Hence, ABB management expects substantial gains from cross-selling, elimination of administrative overlap, and consolidation of manufacturing bases. Yet, technological challenges remain in the integration of Elsag Bailey's various software platforms into the open systems architecture of ABB. Also, the group will have to support Elsag Bailey's installed base for an extended period and eventually develop a convincing migration path to the combined open systems solution. Because of the extra cost incurred by supporting various systems, the speed of migration will materially impact on the realization of synergy gains. Based on ABB's good track record of integrating new businesses, we expect a smooth implementation and fast pay-back for the investment.
Moody's Aa2 rating for senior debt of ABB is based primarily on management's capacity to develop sound long term strategies, to keep business processes lean and efficient, and to respond quickly to changes in the operating environment. Financial parameters of ABB are currently below the rating category, so that the confirmation anticipates a significant improvement in cash generation and tight control of the company's capital structure. Peaks in debt levels after acquisitions (like Elsag Bailey) or other strategic transactions should remain temporary. A sustained, positive cash balance, net of financial debt, appears appropriate for a double-A rated company with ABB's business profile.
ABB Asea Brown Boveri Ltd., headquartered in Zurich, Switzerland, is a $35 billion sales, global engineering group serving customers in electric power generation, transmission, and distribution, automation, oil, gas & petrochemicals, products and contracting.
Elsag Bailey Process Automation N.V., headquartered in Amsterdam, The Netherlands, is a leading global supplier of automation systems, products, and services for the process industries with revenues of $1.5 billion in 1997.
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