S&P Lifts Outlook on Wabtec (WAB) to Positive
Standard & Poor's Ratings Services said today that it revised its rating outlook on Wilmerding, Pa.-based Westinghouse Air Brake Technologies Corp. (NYSE: WAB) to positive from stable. At the same time, we affirmed our ratings on the company, including the 'BBB-' corporate credit rating.
"The positive outlook reflects the company's good operating performance and credit measures, which exceed our expectations. Wabtec has demonstrated a more disciplined approach to debt-funded activities than we had expected, and the company's good operating performance has contributed to increased capacity for medium and large debt-funded acquisitions," said Standard & Poor's credit analyst Sarah Wyeth. "We also believe the company has modestly reduced its exposure to the highly cyclical freight car original equipment manufacturer (OEM) market, which should result in relatively stable leverage metrics in an economic downturn." We could raise the rating if we believe the company is likely to maintain funds from operations (FFO) to debt of 45%-60% and debt to EBITDA of 1.5x-2.0x while it pursues acquisitions.
We expect Wabtec to continue benefiting from stable transit rail traffic volumes. We also expect the company to generate consistent free cash flow of more than $200 million. Our base-case forecast assumes the following:
- U.S. GDP grows 2%-3% in 2014 and 2015, and Europe emerges from its recession with very slow growth;
- Transit rail markets remain stable;
- Freight car deliveries increase about 10%;
- EBITDA margin remains in the high-teens percentage area; and
- Wabtec augments its organic growth with additional acquisitions, largely funded with debt.
The positive outlook reflects our view that if Wabtec's operating performance remains good and the company adheres to a moderate financial policy, it could maintain leverage appropriate for a higher rating while it pursues debt-funded acquisitions.
We could raise the rating if we expect that Wabtec will maintain leverage metrics of FFO to debt of about 45%-60% and debt to EBITDA of 1.5x-2.0x as it pursues debt-funded acquisitions. We could also raise the rating if the company improves its scope, scale, and end-market diversity significantly, organically or via acquisitions.
We could revise the outlook to stable if the company's operating performance deteriorates or if it pursues a more aggressive financial policy than we expect, such that debt-financed acquisitions or shareholder-friendly activities result in debt to EBITDA greater than 2x and FFO to debt declining to about 30%.
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