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Rating Action:

Moody's assigns B2 CFR to CIRCOR International; stable outlook

08 Nov 2017

New York, November 08, 2017 -- Moody's Investors Service (Moody's) assigned new ratings to CIRCOR International, Inc. (CIRCOR), including a B2 Corporate Family Rating (CFR), B2-PD Probability of Default Rating, B1 senior secured ratings and an SGL-3 Speculative Grade Liquidity rating. The rating outlook is stable.

CIRCOR plans to raise $935 million of secured debt financing - a $150 million first-lien revolving credit facility and a $785 million first-lien term loan - to help fund the purchase of Colfax Corporation's Fluid Handling business (Fluid Handling) for $855 million and to repay existing CIRCOR debt. The purchase price includes CIRCOR common stock issued to Colfax for $163 million and $150 million of assumed net pension liabilities.

Moody's took the following rating actions on CIRCOR International, Inc.:

- Corporate Family Rating assigned at B2

- Probability of Default Rating assigned at B2-PD

- First-Lien Gtd Senior Secured Revolving Credit Facility assigned at B1 (LGD3)

- First-Lien Gtd Senior Secured Term Loan assigned at B1 (LGD3)

- Speculative Grade Liquidity Rating assigned at SGL-3

- Rating outlook stable

RATINGS RATIONALE

The ratings reflect CIRCOR's favorable niche market focus within severe flow control applications, diverse and highly reputable customer base, increasingly variable cost structure and asset-light business model that have helped maintain margins and free cash flow despite the multi-year negative trend in revenues. The acquisition of Fluid Handling, with its industry-leading screw pumps, complements CIRCOR's valve offerings and enhances overall scale and scope within the large, highly fragmented global flow control sector. Fluid Handling also brings with it a meaningful aftermarket/recurring revenue stream that should immediately boost margins and cash flow.

Operations are geared towards end markets that can be highly cyclical (oil and gas, commercial marine, numerous industrial sectors) as indicated by weak organic revenue growth since 2014 that is being driven by the prolonged weakness and uncertainty in the oil and gas markets. The purchase of Fluid Handling is CIRCOR's largest to-date and raises pro forma leverage to over 6x incorporating Moody's standard adjustments. The company's ability to generate cash even during downcycles - CIRCOR on a standalone basis has averaged free cash flow of $40 million/year over the past 5 years despite a 30% decline in revenues - should result in some level of accelerated debt repayment, however lingering softness in the oil and gas sector at nearly 40% of pro forma revenues could protract the de-levering process at a time of increased financial, and at least initially, operational risk. Steady deleveraging through both debt reduction and earnings growth is an important element of the ratings.

CIRCOR has adequate liquidity, although Moody's expects a cash balance lower than historical levels. Free cash flow is expected to approach $50 million over the next twelve months, eclipsing the five-year annual average. Concurrent with the funding of the proposed term loan, CIRCOR will raise a $150 million revolving credit facility set to expire in 2022. The facility will have near full availability at transaction close with Moody's expectations for modest, if any, usage over the next twelve months. The facility is subject to only a springing total net first-lien leverage ratio tested if the aggregate amount of outstanding borrowings exceeds a set percentage of the facility. The term loan does not contain any financial maintenance covenants. There are no near-term debt maturities other than the approximately $8 million of annual amortization payments required on the term loan. With the first-lien revolving facility and first-lien term loan, there are limited sources of alternate liquidity as substantially all assets are pledged.

The rating outlook is stable, reflecting Moody's expectations that CIRCOR's end markets will demonstrate stronger fundamentals over the next couple of years - in stark contrast to recent annual trends but meaningfully less than CIRCOR's forward expectations - leading to free cash flow, even in a modestly growing macro-environment, being applied to debt reduction. Several trends (customers' plans to increase capital expenditures, increases in backlogs, the return of organic growth) within oil and gas and the industrial markets seem to indicate a potential pickup in demand, however Moody's notes that actual spending remains cautious. The addition of Fluid Handling should add resiliency to the top-line with its aftermarket presence while margins should also benefit from reasonable revenue and cost synergies.

A sharp rebound in the energy markets (i.e. the return of organic growth) and higher than anticipated growth in margins and cash flow generation used for debt repayment, boosted by the addition of Fluid Handling and cost structure improvements, could result in an upgrade. From a metrics standpoint, leverage near 5x and free cash flow-to-debt in the mid-to-upper single digit range would be important in considering an upgrade. Accelerated growth in recurring revenues that would help moderate top-line volatility would also be viewed favorably. The continuation of negative organic revenue growth and significant top-line volatility, the inability to capture meaningful synergies (revenue and cost) from the Fluid Handling acquisition or reduced cash flow generation that protracts the de-levering process and weakens the liquidity profile (the cash position is already expected to be modest relative to the pro forma revenue base) could result in negative rating action. Additionally, debt-to-EBITDA remaining near the 6.5x range, FCF-to-debt dropping below 5% for an extended period of time or the EBITDA margin falling to the low-double digit range could warrant a downgrade.

CIRCOR International, Inc. provides flow and motion control precision-engineered valves, fittings, switches, sensors and flight components for use in extreme operating environments (e.g. high pressure, high temperature, caustic fluids, fluids with abrasives) within the oil and gas, aerospace and power process industries. With Fluid Handling, the product portfolio will also include screw pumps and centrifugal pumps for severe flow control applications. Pro forma revenues for the fiscal year ended December 31, 2017 will be approximately $1.1 billion.

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.

Eric Greaser
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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