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Rating Action:

Moody's changes Eaton's outlook to stable from positive; affirms Baa1 senior unsecured rating

30 Jun 2020

New York, June 30, 2020 -- Moody's Investors Service ("Moody's") has changed the outlook for Eaton Corporation ("Eaton") to stable from positive and affirmed all ratings for the company, including the Baa1 senior unsecured debt rating.

"The current industrial downturn that has been deepened by the effects of coronavirus has halted Eaton's path towards deleveraging and margin improvement, and a credit profile supportive of a higher rating now seems unlikely for at least two years," says David Berge, Moody's Senior Vice President and lead analyst for the company.

"While the sale of the hydraulics business later in the year will provide a significant cash injection for a company that otherwise maintains only modest cash reserves, there remains considerable uncertainty as to how these proceeds will be deployed," added Berge.

The rapid and widening spread of the coronavirus outbreak, the deteriorating global economic outlook, low and volatile oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The industrial goods industry sub-sector has been one of the most significantly affected given its sensitivity to consumer demand and sentiment. More specifically, Eaton's exposure to the aerospace and automotive end markets, in particular, render the company vulnerable to shifts in market sentiment and operational disruption in these unprecedented times, and Eaton remains vulnerable to the lingering adverse effects of 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.

RATINGS RATIONALE

Eaton's ratings are broadly supported by its stature as a highly-diversified manufacturer with significant scale at approximately $21 billion in revenues and consistent EBITA margins in the mid-teens range that will likely be maintained throughout the downturn. This results in free cash flow generation that is expected at close to $1 billion annually in 2020 and 2021, an important factor supporting strong underlying liquidity as the company maintains relatively modest cash balances compared to industrial peers (approximately $417 million in cash and marketable securities as of March 31, 2020). Eaton has demonstrated a commitment to maintaining a strong credit profile, exemplified by a Moody's-adjusted debt-to-EBITDA sustained at approximately 2.5x over the last few years. However, Moody's expects that leverage will exceed 3x in 2020 as earnings decline due to end market weakness this year, and only gradually restored to the mid-2x range by 2022 as business conditions improve.

Like most industrial companies, Eaton will encounter a significant drop in revenue in 2020 as the coronavirus pandemic will have a modest impact (less than 10% decline from 2019 levels) on the company's core electrical segments (over 60% of revenue), but will more dramatically affect Eaton's aerospace, vehicles, and hydraulics segments where revenue declines in excess of 20% are expected. Although cost reduction initiatives are underway during this downturn, Moody's expects Eaton's EBITA margins to fall below 15% for the first time in several years. However, over the long run, revenue growth and margin improvement will likely resume, aided by the company's current portfolio rebalancing strategies, with the planned disposal of the cyclical and less profitable hydraulics business replaced in time by higher margin acquired businesses that will add diversity to Eaton's portfolio.

Moody's expects that Eaton will deploy a majority of its free cash flow along with proceeds from the planned business disposals towards a combination of M&A and share repurchases, with an increased focus on acquisitions. As such, debt is expected to remain close to current levels over the next few years, which will allow the company to restore and maintain leverage in the mid-2x range over that time.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Eaton's ratings could be upgraded if the company employs fiscally conservative financial policies, including the prioritization of capital deployment towards planned acquisitions (if not debt repayment) rather than shareholder returns (with no material increase in debt). The company would also need to demonstrate that it can maintain EBITA margins in excess of 15% and debt-to-EBITDA of 2.5x or below.

Ratings could be downgraded if Eaton encounters a meaningful and enduring decline in revenue past 2020, or weakening demand characteristics in major markets without a corresponding reduction in its cost base. Lower ratings could also be considered in the event of a sizable debt-funded acquisition or shareholder distribution, resulting in debt-to-EBITDA sustained above the mid-3x level, or if EBITA margins are expected to decline to the low-teens percentage range.

Eaton Corporation (NYSE: ETN), headquartered in Ireland with offices in Cleveland, Ohio, is a diversified industrial company with LTM revenues of $20.9 billion as of March 2020. The company is focused on managing electrical, fluid and mechanical power and organizes its operations into six segments: Electrical Americas, Electrical Global, Hydraulics, Aerospace, Vehicle, and eMobility.

The following rating actions were taken:

Affirmations:

..Issuer: Cooper US, Inc.

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Eaton Capital Unlimited Company

....Commercial Paper, Affirmed P-2

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Eaton Corporation

....Senior Unsecured Shelf, Affirmed (P)Baa1

....Commercial Paper, Affirmed P-2

....Senior Unsecured Medium-Term Note Program, Affirmed (P)Baa1

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

..Issuer: Turlock Corporation (all debts assumed by Eaton Corporation)

....Senior Unsecured Regular Bond/Debenture, Affirmed Baa1

Outlook Actions:

..Issuer: Cooper US, Inc.

....Outlook, Changed To Stable From Positive

..Issuer: Eaton Corporation

....Outlook, Changed To Stable From Positive

..Issuer: Eaton Capital Unlimited Company

....Outlook, Changed To Stable From No Outlook

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.

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.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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.

David Berge, CFA
Senior Vice President
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

No Related Data.
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