Approximately $3 billion of rated debt affected
New York, June 24, 2020 -- Moody's Investors Service ("Moody's") assigned
a Baa2 rating to Xylem Inc.'s (Xylem) new senior unsecured
(green bond) notes issuance. Concurrently, Moody's affirmed
all existing ratings for Xylem, including the company's Baa2 senior
unsecured rating and Prime-2 short-term rating. The
ratings outlook remains stable.
A portion of the proceeds from the proposed notes issuance is expected
to be used towards a portfolio of Eligible Green Projects across Xylem's
three business segments. Net proceeds are also expected to be used
for general corporate purposes, including enhancing the company's
liquidity profile via investments in highly liquid short-term securities.
"The proposed notes issuance is a credit positive development for
Xylem as it works to enhance its solid liquidity profile by increasing
cash balances to more than cover debt maturities through 2021 amid the
coronavirus pandemic," says Gigi Adamo, Moody's Vice President
and lead analyst for Xylem. "The company's previously announced
cost reduction actions and bank amendment further support its overall
credit and liquidity profile, and our expectation that management
will maintain its relatively conservative fiscal policies that should
facilitate fairly rapid deleveraging of the balance sheet as macroeconomic
conditions improve," added Adamo.
RATINGS RATIONALE
The ratings and ratings affirmations reflect Moody's expectation
that key credit metrics will be strained in 2020 as margins compress and
debt-to-EBITDA approaches 5.0x, and free cash
flow generation is pressured by the expected decline in earnings and negative
working capital changes. However, Moody's also anticipates
that the steep decline in revenues during the first half of 2020 will
begin to stabilize during the second half of the year, and that
partially due to the benefits of cost reduction efforts, leverage
and free cash flow will improve, with debt-to-EBITDA
reverting to the low-3.0x range and FCF-to-debt
approaching the high single-digit percentage range by the end of
2021.
Importantly, the company is taking proactive measures through different
avenues to preserve a very good liquidity profile including increasing
cash balances through the proposed debt issuance that more than exceeds
the company's 4.875% $600 million notes maturity
in October 2021, and the bank amendment that modified the company's
financial maintenance covenant to a net debt-to-EBITDA metric
(versus gross debt-to-EBITDA, previously), facilitating
greater access to the company's revolving credit facility. The
ratings and ratings affirmations also reflect the benefits of current
announced actions on the operational front. The company's
publicly announced $100 million of actions to reduce operating
expenses and capital expenditures are expected to partially offset the
negative impact of volume-related revenue declines in 2020 stemming
from the coronavirus pandemic. These actions are expected to contribute
to the restoration of margins and free cash flows during the course of
2021.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, low oil prices, and high asset price
volatility have created an unprecedented credit shock across a range of
sectors and regions. The combined credit effects of these developments
are unprecedented. The manufacturing sector has been one of the
sectors affected by the shock given its sensitivity to consumer demand
and sentiment. More specifically, the weaker expected near-term
earnings profile of Xylem, including its exposure to production
and supply chains globally, have left it vulnerable to shifts in
market sentiment in these unprecedented operating conditions, and
Xylem remains vulnerable to the adverse impact from the outbreak.
Moody's regards the coronavirus outbreak as a social risk under its ESG
framework, given the substantial implications for public health
and safety.
The stable outlook reflects Moody's expectation that the company
will effectively manage the negative revenue and earnings impact from
the coronavirus pandemic through cost realignment actions while maintaining
its market share gains and expanding developed and emerging market opportunities.
Sustainment of a healthy backlog also provides longer-term revenue
visibility. As the company exits the negative near-term
margin impact from the pandemic, margins are expected to resume
expansion over the next couple of years with a focus on technology,
value-added software and solutions and increasing benefits from
ongoing realignment initiatives.
Xylem's Baa2 rating broadly reflects the company's brand strength
reflected in healthy margins and solid market position with a geographically
diverse revenue base within the water infrastructure industry which Moody's
views as a relatively stable, steady growth sector over the longer
term. Moody's expects that although credit metrics will weaken
considerably in 2020 as Xylem contends with weaker demand stemming from
the coronavirus pandemic, the company will maintain a very good
liquidity profile, lower but still healthy EBITDA margins,
and EBITA-to-interest coverage exceeding 7.0x during
the downturn. At the same time, Moody's anticipates that
Xylem's free cash flow generation will meaningfully weaken in 2020 due
to the aforementioned coronavirus-related earnings pressures,
and as the company incurs costs to re-align its expense base to
lower demand levels in 2020. We expect that the company's cost
actions will result in an improved go-forward cost structure post-pandemic.
Moody's took the following rating actions on Xylem Inc.:
Assignments:
..Issuer: Xylem Inc.
....Senior Unsecured Regular Bond/Debenture,
Assigned Baa2
Affirmations:
..Issuer: Xylem Inc.
....Senior Unsecured Commercial Paper,
Affirmed P-2
....Senior Unsecured Regular Bond/Debenture,
Affirmed Baa2
Outlook Actions:
..Issuer: Xylem Inc.
....Outlook, Remains Stable
Environmental considerations are an important factor positively contributing
to the company's credit profile. Xylem possesses a water-focused
corporate business model centered on global sustainability. The
company competes in the large, highly fragmented global water industry
where sustainable growth is being driven by several favorable long-term
trends ranging from global water scarcity, erratic weather patterns,
increasing environmental regulations, an increase in type and amount
of contaminants in the water supply, mature markets with aging infrastructures,
and emerging markets that require infrastructure installation.
Beyond its operations, the company's financial structure is
also tied to environmental sustainability. Xylem's bank credit
facility contains features linked to sustainability indices and the proposed
notes issuance is being issued as a green bond given the company's
partial use of proceeds towards projects focused on environmental sustainability.
From a corporate governance perspective, the company is expected
to maintain a relatively conservative financial policy, particularly
amid the coronavirus pandemic, with the implementation of aggressive
cost reduction actions, share repurchases only insofar as to avoid
share dilution, and a focus on sufficient liquidity sources to cover
obligations through 2021. Actions that would further increase the
company's financial leverage beyond the currently anticipated earnings
decline resulting from the coronavirus pandemic are not expected.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given current market uncertainty due to the coronavirus pandemic,
upward ratings pressure is not likely in the near-term.
However, factors that could cause upward ratings pressure include
accelerated growth in higher-margin recurring or contracted revenues,
free cash flow-to-debt approaching 15%, and
debt-to-EBITDA trending towards 2x. EBITDA margins
improving to the mid-20% range would also contribute to
upward ratings pressure.
Conversely, factors that could pressure ratings downward include
the inability to achieve and sustain meaningful organic revenue growth,
a more aggressive stance on the company's capital deployment strategy,
debt-to-EBITDA sustained above 3.5x beyond 2021,
and free cash flow-to-debt under 10% beyond 2021.
The principal methodology used in these ratings was Manufacturing Methodology
published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Headquartered in Rye Brook, New York, Xylem Inc. provides
water and wastewater infrastructure equipment and services across the
entire water cycle -- collection, distribution, use and
return to the environment. The Water Infrastructure segment focuses
on the transportation, treatment and testing of water; the
Applied Water segment focuses on the uses of water as it relates to residential,
commercial, industrial and agricultural markets; and the Measurement
& Control Solutions segment focuses on intelligent use and conservation
of critical water and energy resources. The company reported revenues
of approximately $5.1 billion for the latest twelve months
ended March 31, 2020.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that issued the credit rating is available on www.moodys.com.
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
Russell Solomon
Associate Managing Director
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
