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Rating Action:

Moody's affirms Gardner Denver's CFR at Ba3 following planned combination with Ingersoll Rand's Industrial segment; outlook positive

30 Apr 2019

Approximately $2.2 billion of rated debt affected

New York, April 30, 2019 -- Moody's Investors Service ("Moody's") affirmed the ratings of Gardner Denver, Inc. ("Gardner Denver," or "the company") including its Ba3 and Ba3-PD Corporate Family Rating ("CFR") and Probability of Default Rating, respectively, Ba3 senior secured rating and SGL-1 Speculative Grade Liquidity rating, following the announcement that it has entered into a definitive agreement to be combined with the Industrial business of Ingersoll-Rand Plc. The outlook is positive.

The proposed combination is being structured as a Reverse Morris Trust transaction with Gardner Denver combining with Ingersoll-Rand's Industrial business for an implied approximate 11.0x EBITDA multiple (excluding synergies). The purchase consideration is expected to include $1.9 billion of debt and $5.8bn equity consideration.

RATINGS RATIONALE

Moody's views Gardner Denver's planned combination with IR's Industrial business as credit positive given the more than two fold increase in the company's revenues, increased end-market diversification and complementary product portfolio that would result from the transaction. Pro forma for the planned transaction, Gardner Denver's debt/EBITDA remains essentially neutral (including Moody's standard adjustments) at approximating 2.6x. Going forward, we anticipate that the company will be able to realize cost synergies from the combined businesses through manufacturing and supply chain efficiencies as well as streamlining costs. The adoption of both Gardner Denver and Ingersoll-Rand's business operating systems and operating excellence measures should also contribute to improvement of the combined company's margins. However, the company's announced $250 million of anticipated annualized synergies from the planned combination in three-years is sizable and Moody's expects that it would take several years for those synergies to become evident.

Positively, Gardner Denver and Ingersoll-Rand's product portfolio complement each other and include well-established and recognized brands. End-market diversification will increase with Gardner Denver's highly cyclical energy end-market exposure pro forma for the proposed transaction decreasing to roughly 10% of revenues versus approximately 25% at 2018 year-end. Given both entities' low capital intensity with 2-3% of capex/revenue and track record of strong cash flow generation, we expect that the combination will result in a solid free cash flow profile. In addition, KKR's ownership of the company is expected to be reduced to approximately 17% through the proposed combination due to the equity portion of the consideration, thereby decreasing event risk.

Pro forma for the planned combination, the company's margin profile is expected to weaken over the short-term given Ingersoll-Rand Industrial's lower margins versus Gardner Denver with the expectation that margins will revert to Gardner Denver's current approximate 25% reported EBITDA margins during the course of three to four years. In addition, the proposed transaction is a very sizable combination for Gardner Denver and integration risk from the combination as well as costs to effectuate the transaction and achieve expected synergies are credit considerations. Furthermore, the absolute amount of funded debt would essentially double pro forma for the transaction.

Gardner Denver's Ba3 CFR continues to reflect its well-established position in engineered products, diversity by end-market and geography, healthy margins and good free cash flow generation. The company's EBITDA margins are supported by its brand strength in mission critical applications in its core energy, industrial and medical segments as well as the benefits from restructuring efforts. The company possesses a relatively large scale within its market, a sizable aftermarket business (grown to approximately 40% of sales) and diversity by end-market and geography with roughly half of sales generated abroad. These factors temper the high degree of cyclicality in certain of its end-markets such as oil and gas drilling and economically-sensitive industrial businesses.

The company's speculative grade liquidity rating ("SGL") was affirmed at SGL-1, reflecting Moody's expectation that the company will maintain very good liquidity supported by strong free cash flow generation, a sizable cash balance, and lack of meaningful debt maturities over the next 12-15 months.

The positive outlook is based both on the expectation that the company will continue to organically grow revenue at the mid-single digit level or above due to positive order trends and realize synergies such that debt/EBITDA remains at the mid-2.0x range over the next twelve to eighteen months together with the potential benefits in terms of scale, market position and diversification from its pending combination with Ingersoll-Rand's Industrial business. The continued reduction in KKR's ownership interest is also reflected in the outlook change.

Moody's took the following rating actions on Gardner Denver, Inc.:

Ratings Affirmed:

Corporate Family Rating, Ba3

Probability of Default Rating, Ba3-PD

$270 million senior secured revolving credit facility due 2020, Ba3 (LGD3)

$1.3 billion senior secured term loan due 2024, Ba3 (LGD3)

€615 million senior secured term loan due 2024, Ba3 (LGD3)

Speculative Grade Liquidity Rating, at SGL-1

Outlook Action:

Outlook, changed to Positive, from Stable

An upward rating action would be driven by a continued increase in revenue scale through organic growth and acquisitions that increase the company's revenue base and diversification without adding to the company's leverage profile. Expectations of debt-to-EBITDA improving to and sustained in the high 2x level, EBITA-to-interest exceeding 5.0x on a sustained basis and free cash flow-to-debt in excess of 15% while maintaining strong liquidity would support an upgrade. A normalized governance structure with a diverse group of shareholders that balances debt and equity holders would also be considered.

The ratings could be downgraded if revenue and earnings deteriorate, debt-to-EBITDA exceeds 3.5x, EBITA-to-interest coverage weakens to below 3.0x and is sustained at those levels, or liquidity meaningfully erodes. An aggressive financial policy such as debt-financed share repurchases from KKR or the open market, introduction of a meaningful recurring dividend, or sizable acquisitions could also lead to a downgrade.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Jadijhe (Gigi) Adamo
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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