Moody’s goes negative on Weir but affirms rating

Moody’s Investors Service on Tuesday changed its outlook for Glasgow based engineering giant Weir Group Plc to “negative” from “stable” while affirming the Baa3 rating of the group.

Explaining its rationale, Moody’s said: “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 …”