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Rating Action:

Moody's changes ABB's outlook to negative; affirms A2/P-1 ratings

19 Dec 2018

Frankfurt am Main, December 19, 2018 -- Moody's Investors Service ("Moody's") today changed the outlook on the A2 long-term issuer rating of ABB Ltd. (ABB) to negative from stable. At the same time, Moody's affirmed ABB's A2 long-term issuer rating, the P-1 short-term issuer rating and the A2 rated debt instruments. A full list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

Moody's has changed the outlook to negative from stable to reflect the impact of the disposal of 80.1% of the company's Power Grid business (PG) to Hitachi, Ltd. (A3 stable) and in particular ABB's intention to pay-out the proceeds to the shareholders.

"The change in the outlook to negative especially reflects that the nature of this transaction indicates ABB's shift towards a more shareholder oriented financial policy", says Stephan Wulf, a Moody's Vice President-Senior Analyst and lead analyst for ABB, "to avoid a downgrade, ABB is required to improve its credit metrics back towards the requirements for the A2 rating category driven by performance improvements of its remaining core business or a more balanced financial policy", Wulf continues.

ABB announced that it intends to distribute the entire net cash proceeds from this transaction (up to $7.8bn, valuing 100% of PG's EV at $11bn) to its shareholders through share buyback or similar mechanism. The closing of the transaction is expected by the end of 1H 2020 until then ABB will report PG's earnings as discontinued operations. After closing, ABB will keep a 19.9% stake in PG with a put option to sell this stake to Hitachi within three years after closing at a floor price of 90% of the agreed EV. At the same time, Hitachi holds a call option to buy the remaining stake for 100% of the agreed EV within three years after closing.

Through this transaction ABB will lose a substantial part of its revenues and earnings (2017: 28% of group sales and 22% of Operational EBITA), without benefiting from an adequate deleveraging, as proceeds are intended to be paid out entirely to shareholders. ABB's debt ($12.4 billion as of Q318; Moody's adjusted), will only be reduced by the transfer of $300 million pension and other obligations, which will stay with PG. Thus ABB's leverage will remain elevated with adjusted Debt/EBITDA of currently 2.4x on the last twelve months basis ended September 2018, well above our downgrade trigger of 2x. Only in 2021, we expect ABB's leverage to decrease below that threshold, driven predominantly by operating improvements. The negative outlook takes also into account that ABB's profitability is still burdened by the integration of GE Industrial Solutions (GEIS), which is expected to consume a total of slightly more than $400 million in charges to fully reap benefits from synergies and to bring GEIS operating EBITA margin up to ABB group level.

On the other hand, the affirmation of ABB's A2 long-term issuer rating reflects the new and simplified company structure, in which ABB will focus on opportunities arising from the digitalization of ABB's markets. Given PG's history with relatively low margins and volatile cash flow generation, this transaction also helps to somehow de-risk ABB's business model. This should therefore also allow for higher, more steady growth rates (ABB's midterm target: 3-6%), more attractive margins and less volatility. The affirmation of ABB's A2 long-term issuer rating also indicates ABB's proven willingness in flexibly executing its share buyback programs. The company, for example, put on hold the $3 billion share buyback it announced in late 2016 due to the Bernecker + Rainer Industrie-Elektronik GmbH (B&R) and GE IS acquisitions. Since ABB reiterated its commitment to maintain its long-term "single A" credit rating, we expect such a flexibility also for its new share buyback program and anticipate ABB to take measures that would protect the capital structure, and, hence, current ratings in times of increasing pressure on its balance sheet.

Furthermore, the affirmation of ABB's A2 long-term issuer rating takes into account that the integration of GEIS will further succeed, with elevating its profitability towards group's level. We will closely monitor the further recovery of ABB's margins as well as the company's tendency towards high cash payments to shareholders.

WHAT COULD CHANGE THE RATING UP / DOWN

Ratings could be downgraded if (1) EBITA margin were less than 12%; (2) FCF/debt less than 10%; and (3) Debt/EBITDA of more than 2.0x for extended periods. Moody's could upgrade the rating if (1) EBITA margin were higher than 15%; (2) FCF/debt in excess of 20%; and (3) Debt/EBITDA less than 1.5x.

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.

ABB is one of the largest suppliers of power and automation technologies worldwide, with consolidated revenue of $34.3 billion in 2017 ($33.8 billion in 2016). Following a reorganization (effective January 2017), ABB has four divisions: Power Grids (approximately 28% of revenue), Electrification Products (29%), Robotics and Motion (24%) and Industrial Automation (19%). On December 17 2018 ABB announced to sell 80.1% of its Power Grids business to Hitachi. The group is headquartered in Zurich, Switzerland, and has approximately 147,000 employees. ABB Ltd., the parent company, is listed in Zurich, Stockholm and New York, with a 10.71% stake held by the Swedish investment company Investor AB (Aa3 stable) and 5.34% by Cevian Capital (unrated).

Affirmations:

..Issuer: ABB Ltd.

.... Issuer Rating, Affirmed A2

.... Issuer Rating, Affirmed P-1

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: ABB Asea Brown Boveri Ltd.

.... Issuer Rating, Affirmed A2

..Issuer: ABB Capital B.V.

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

..Issuer: ABB Finance B.V.

....Backed Senior Unsecured Commercial Paper, Affirmed P-1

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: ABB Finance (USA) Inc

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)A2

....Backed Senior Unsecured Medium-Term Note Program, Affirmed (P)P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2

....Backed Senior Unsecured Shelf, Affirmed (P)A2

..Issuer: ABB Holdings, Inc.

.... Issuer Rating, Affirmed A2

..Issuer: ABB Treasury Center (USA) Inc.

....Backed Senior Unsecured Commercial Paper, Affirmed P-1

....Backed Senior Unsecured Regular Bond/Debenture, Affirmed A2

..Issuer: Thomas & Betts Corporation

....Senior Unsecured Regular Bond/Debenture, Affirmed A2

Outlook Actions:

..Issuer: ABB Ltd.

....Outlook, Changed To Negative From Stable

..Issuer: ABB Asea Brown Boveri Ltd.

....Outlook, Changed To Negative From Stable

..Issuer: ABB Capital B.V.

....Outlook, Changed To Negative From Stable

..Issuer: ABB Finance B.V.

....Outlook, Changed To Negative From Stable

..Issuer: ABB Finance (USA) Inc

....Outlook, Changed To Negative From Stable

..Issuer: ABB Holdings, Inc.

....Outlook, Changed To Negative From Stable

..Issuer: ABB Treasury Center (USA) Inc.

....Outlook, Changed To Negative From Stable

..Issuer: Thomas & Betts Corporation

....Outlook, Changed To Negative From Stable

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.

Stephan Wulf
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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