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Rating Action:

Moody's changes outlook to negative for Weir; affirms Baa3 rating

07 Apr 2020

London, 07 April 2020 -- Moody's Investors Service ('Moody's') has today changed the outlook for Weir Group Plc (The), or Weir (company), to negative from stable. Concurrently, Moody's has also affirmed the ratings of Weir.

A list of affected ratings can be found at the end of this press release.

RATINGS RATIONALE

The negative outlook considers that Moody's-adjusted debt/EBITDA of 3.7x and Moody's-adjusted retained cash flow (RCF)/net debt of 14.9% has remained outside the range for a Baa3 rating in the last several years, including 2019, and Moody's expectation that this will likely remain the case for at least 2020 even without taking into account the current macro developments. Accordingly, there is an increased risk of a downgrade.

While Moody's continues to see investment-grade characteristics in the company's business profile, Moody's will assess the company's corporate governance with regard to financial policy and willingness and capacity to achieve required metrics for the Baa3 rating. This assessment will include the company's willingness and ability to achieve its own leverage target of below 2.0x, also in the context of its approach to dividends and shareholder remuneration, as well as liquidity and maturity profile management.

In addition, the rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling 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 manufacturing sector and some of Weir's end markets have been significantly affected by the shock. More specifically, the weaknesses in the company's credit profile, including its exposure to highly volatile US upstream oil & gas end markets (for example shale gas) and mining operations across the globe have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the companies remain vulnerable to the outbreak continuing to spread. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.

Moody's believes that Weir's Oil & Gas segment will come under significant further pressure in 2020 with further significant revenue drops and possibly negative EBITA margin. The Minerals and ESCO segments should be more resilient, because they are typically less volatile from a revenue and margin perspective. This would be consistent with the last downturn in 2015-16. As a result, financial metrics are likely to significantly weaken, but Moody's views liquidity as sufficient due to Weir's committed facilities and potential access to funding, typically positive working capital cash flow contributions during a downturn, decision to not recommend a final dividend for 2019 and likely actions to cut cost and capital expenditure where possible and appropriate. However, Moody's also considers it likely that the headroom under its 3.5x net debt to EBITDA covenant, tested semi-annually, is likely to deteriorate from the 2.4x reported at the end of 2019. Moody's would expect the company to take any necessary steps proactively to avoid any tightening of its liquidity headroom in this context.

The affirmation of Weir's ratings remains supported by its (1) strong market leadership in product niches, which are key to the mining and oil and gas industries, with the group being typically the leader or among the global leaders in respective addressable markets and with good market share for core products; (2) good geographical diversification at the group level and wide manufacturing and services footprint with focus on diverse minerals, which enables proximity to its also diverse customer base; (3) business model that is focused on fairly inexpensive but operation-critical products, with very high aftermarket potential, which provides more stability and typically higher margins; and (4) high profitability in its core mining operations and solid free cash flow generation, particularly during downturns.

The main constraints for the ratings are (1) Weir's modest scale in terms of revenue and somewhat narrower product portfolio than that of similarly rated peers; (2) short lead time of its businesses with limited backlog, which constrains revenue visibility into new equipment sales; (3) its exposure to very cyclical end markets such as oil and gas and to a lesser extent mining, which experienced severe pressure during 2015 and 2016 and are likely to do so in 2020; and (4) that the company's reported net debt/EBITDA ratio has been above its stated target of below 2.0x since 2015, which is likely to remain the case for at least 2020, while Moody's-adjusted debt/EBITDA and Moody's-adjusted RCF/Net Debt are also likely to remain outside the expectation for the Baa3 rating for at least 2020.

Environmental considerations play a role for Weir, because the low carbon transition to a degree underpins expectations of good long-term demand for key metals such as copper. The company though also has a smaller exposure to environmentally less friendly metals such as coal. Its customers are also subject to increasing environmental regulations. Weir products can help reduce inefficiencies, for example regarding declining ore grades, and waste/energy consumption, for example water usage, in this context. The company also seeks to reduce its emissions by 50% by 2030. Social considerations also generally include health & safety given its manufacturing operations. Governance considerations include the company's mixed financial policy that includes a conservative company-defined net leverage of below 2.0x, which the company however has not maintained since 2014, as well as substantial dividend payments.

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

Moody's would consider stabilizing the outlook if Moody's believes that the company can achieve metrics commensurate with the Baa3 rating in an appropriate time horizon, such as a 20% RCF/net debt and debt/EBITDA of 3.5x (all Moody's-adjusted). This also includes a broader assessment of the company's financial policy with regard to leverage, shareholder remuneration and liquidity/maturity management. It will also include Moody's assessment of the implications of any Oil & Gas segment divestment on the company's business profile, profitability, cash flow profile and debt levels in this context.

Although unlikely in the context of the current negative outlook, Moody's would consider positive pressure on the rating if Weir improves its capital structure sustainably to a level below 2.5x of Moody's-adjusted debt/EBITDA. Concurrently, Moody's could downgrade the ratings if (1) Weir's liquidity position weakens, for example, because of shrinking flexibility under its net leverage covenant ratio (test level of 3.5x) or because of negative free cash flow generation; (2) there are indications that Moody's-adjusted debt/EBITDA sustainably exceeds 3.5x; or (3) if Moody's-adjusted RCF/net debt falls sustainably below 20%.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: Weir Group Plc (The)

....Issuer Rating, Affirmed Baa3

....Commercial Paper, Affirmed P-3

Outlook Actions:

..Issuer: Weir Group Plc (The)

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

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 Glasgow, UK, Weir is an engineering solution provider focusing on designing, manufacturing and supplying products and engineering services for the minerals and oil & gas markets. Weir bought ESCO in July 2018, a provider of ground engaging tools for large mining machines, and disposed of Flow Control in June 2019. Hence, it now reports in three principal segments: Minerals (around 56% of group revenue in FY 2019), Oil & Gas (23%) and ESCO (21%). For the 12 months ended December 2019, Weir generated revenue of GBP2.7 billion from continuing operations. Weir is a publicly listed company, and as of 1 April 2020, it had a market capitalisation of around GBP1.9 billion. With its 2019 full year results, the company announced that it considers divesting the Oil &Gas segment.

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 outcome announced and described above.

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.

Tobias Wagner, CFA
VP-Sr Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Peter Firth
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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