Fitch Ratings expects to downgrade the debt ratings of
Whirlpool Corporation (WHR) one notch to 'BBB' and affirm the rating
on Whirlpool Corp.'s and Whirlpool Finance B.V.'s commercial paper
programs at 'F2' upon completion of the Maytag merger, which remains
subject to Department of Justice and Maytag's stockholder approval.
Ratings affected are listed below. All ratings remain on Rating Watch
Negative pending completion of the acquisition of Maytag. On June 30,
2005, WHR had $1.6 billion of debt, including $294 million of
commercial paper outstanding.
Expected rating actions by Fitch on Whirlpool include the following:
-- IDR downgraded to 'BBB' from 'BBB+';
-- Senior unsecured notes downgraded to 'BBB' from 'BBB+';
**--Existing $1.2 billion and pending $1 billion additional revolving credit facilities downgraded to 'BBB' from 'BBB+';
**(with Whirlpool Corp., Whirlpool Europe B.V. and Whirlpool Finance B.V. as borrowers)
Fitch also expects to assign a 'BBB' rating to a pending new $500 million one-year facility with one-year term out.
The expected downgrade for Whirlpool reflects the increase in leverage, risks associated with combining operations that could take longer than planned or result in less cost savings than anticipated, the potential for further restructurings after the merger, ongoing difficult industry conditions, and Maytag's poor performance in recent years.
Industry conditions remain challenging with intense competition, retail consolidation and, more recently, materially higher raw material costs. In addition, the potential for slowing consumer demand in the U.S. has increased with higher household debt levels, rising short-term interest rates, which could eventually affect mortgage and home equity borrowing rates, and a robust housing market that may be peaking.
The pending rating change also reflects an improved manufacturing base, particularly in North America, an increased ability to use Whirlpool's global manufacturing platforms and sourcing (which has strengthened productivity, reduce costs and mitigated sustained pricing pressures from competition and consolidating retailers) to drive combined costs significantly lower and the potential to improve product introductions. In addition, distribution channels are expected to be enhanced, particularly with retailers, with Whirlpool selling to 100% of key trade participants and maintaining its position with builders.
Whirlpool's expectations are for a run rate annual cost savings of $300-$400 million after three years, although achieving these efficiencies will require one-time costs and capital investments currently estimated at $350-$500 million. It is expected that these costs will be substantially incurred in the first two years after the acquisition. The magnitude of potential savings appears reasonable with the expectation of considerable cost efficiencies resulting from the combination of the two companies. Cost advantages for producing Maytag's products in existing Whirlpool plants are also anticipated as are purchasing and distribution benefits.
Supporting the proposed rating is Whirlpool's use of equity to finance half of the cash purchase of Maytag's shares, the expectation that free cash flow will be used to reduce debt quickly as well as the expectation of discontinuance of stock repurchases and adequate liquidity. Credit protection measures are anticipated to remain in line with a 'BBB' rated entity. At mid-year 2005, on a combined basis adjusted for the $848 million cash portion of the acquisition, leverage on a total debt/operating EBITDA basis would be 2.4 times (x) up from Whirlpool's current 1.4x and operating EBITDA coverage of interest would decline to approximately 6.2x from Whirlpool's current 8.9x. Cash flow from operations/total debt is anticipated to decline considerably, at least in the first year, after completion of the acquisition reflecting cash outlays required to produce the intended synergies.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Expected rating actions by Fitch on Whirlpool include the following:
-- IDR downgraded to 'BBB' from 'BBB+';
-- Senior unsecured notes downgraded to 'BBB' from 'BBB+';
**--Existing $1.2 billion and pending $1 billion additional revolving credit facilities downgraded to 'BBB' from 'BBB+';
**(with Whirlpool Corp., Whirlpool Europe B.V. and Whirlpool Finance B.V. as borrowers)
Fitch also expects to assign a 'BBB' rating to a pending new $500 million one-year facility with one-year term out.
The expected downgrade for Whirlpool reflects the increase in leverage, risks associated with combining operations that could take longer than planned or result in less cost savings than anticipated, the potential for further restructurings after the merger, ongoing difficult industry conditions, and Maytag's poor performance in recent years.
Industry conditions remain challenging with intense competition, retail consolidation and, more recently, materially higher raw material costs. In addition, the potential for slowing consumer demand in the U.S. has increased with higher household debt levels, rising short-term interest rates, which could eventually affect mortgage and home equity borrowing rates, and a robust housing market that may be peaking.
The pending rating change also reflects an improved manufacturing base, particularly in North America, an increased ability to use Whirlpool's global manufacturing platforms and sourcing (which has strengthened productivity, reduce costs and mitigated sustained pricing pressures from competition and consolidating retailers) to drive combined costs significantly lower and the potential to improve product introductions. In addition, distribution channels are expected to be enhanced, particularly with retailers, with Whirlpool selling to 100% of key trade participants and maintaining its position with builders.
Whirlpool's expectations are for a run rate annual cost savings of $300-$400 million after three years, although achieving these efficiencies will require one-time costs and capital investments currently estimated at $350-$500 million. It is expected that these costs will be substantially incurred in the first two years after the acquisition. The magnitude of potential savings appears reasonable with the expectation of considerable cost efficiencies resulting from the combination of the two companies. Cost advantages for producing Maytag's products in existing Whirlpool plants are also anticipated as are purchasing and distribution benefits.
Supporting the proposed rating is Whirlpool's use of equity to finance half of the cash purchase of Maytag's shares, the expectation that free cash flow will be used to reduce debt quickly as well as the expectation of discontinuance of stock repurchases and adequate liquidity. Credit protection measures are anticipated to remain in line with a 'BBB' rated entity. At mid-year 2005, on a combined basis adjusted for the $848 million cash portion of the acquisition, leverage on a total debt/operating EBITDA basis would be 2.4 times (x) up from Whirlpool's current 1.4x and operating EBITDA coverage of interest would decline to approximately 6.2x from Whirlpool's current 8.9x. Cash flow from operations/total debt is anticipated to decline considerably, at least in the first year, after completion of the acquisition reflecting cash outlays required to produce the intended synergies.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
