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Weir Group Plc (The) -- Moody's changes Weir's outlook to stable; affirms Baa3

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Rating Action: Moody's changes Weir's outlook to stable; affirms Baa3Global Credit Research - 30 Apr 2021London, 30 April 2021 -- Moody's Investors Service ('Moody's') has today changed the outlook for Weir Group Plc (The), or Weir (company), to stable from negative. Concurrently, Moody's has also affirmed the existing ratings of Weir.A list of affected ratings can be found at the end of this press release.RATINGS RATIONALEThe stabilization of the outlook and rating affirmations reflect Moody's expectation that the company's metrics will improve in 2021 to levels that are commensurate with the Baa3 rating. Weir has taken several positive actions in recent months including the application of proceeds from the Oil & Gas division disposal to debt reduction and tightening of its net leverage and dividend policies. In addition, most key end markets benefit from a good market outlook which supports revenue growth and there is some potential for margin improvement in 2021 and thereafter. The outlook stabilization also incorporates Moody's expectation that the company will address its 2022 debt maturities in a timely manner.Weir's Moody's-adjusted debt/EBITDA remained elevated in 2020 at 4.5x despite a relatively stable performance, but Moody's expects the metric to reduce below 3.5x and to remain within Moody's expectations for the rating going forward. The improvement in leverage is in the first instance driven by debt reduction as a result from the Oil & Gas division disposal, which has already taken place, but Moody's also expects further debt reduction going forward. In addition, there is some margin growth potential in 2021 given the now simplified business, some investments into shared services centres and consolidation around overhead costs. The company also aims for mid-to-high single digit revenue growth going forward, underpinned by good end market conditions, which would also support margin and profit growth. However, year-on-year revenue growth will likely be lower in 2021 due to a large one-off order received last year while raw material cost inflation also presents a risk to margin growth.The company's retained cash flow to net debt metric also improved significantly in 2020 to 24% from 10% in 2019 due to the suspension of dividends. Moody's expects RCF/net debt to remain above 20% given the company's updated dividend policy of 33% of earnings per share instead of a progressive dividend policy. The reduction of the net leverage target, as defined by Weir, to a normal range of 0.5-1.5x from below 2.0x previously also indicates the company's intention to improve its credit metrics further in the coming years as the company's December 2020 net leverage was 1.7x pro-forma for the disposal-related debt reduction.While further disposals appear less likely in the future because the company has essentially achieved its desired focus as a pure-play mining and minerals business, debt-funded acquisitions could temporarily increase leverage. However, Moody's would expect the company to remain disciplined and adhere to its financial policy.Weir's rating also remains supported by its (1) strong market leadership in product niches, which are key to the mining industry, 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. These supporting factors are balanced by (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 mainly one end market, mining and minerals, which experiences some cyclical pressures at times although profit volatility is now lower after the Oil & Gas division disposal.Weir's liquidity profile is good. As of December 2020, the company had GBP575 million of available liquidity including GBP374 million of cash. The $950 million committed revolving credit facility (RCF) is due in June 2023 with the option to extend for a further two years. The company has several debt maturities in the next two years including the March 2022 GBP200 million term loan, the February 2022 $590 million private placement notes and February 2023 $200 million private placement notes. Moody's would expect the company to address these maturities in a timely manner. The company has no other material debt maturities but has a $1 billion commercial paper programme, which was unused as of December 2020. The company has a net debt/EBITDA financial maintenance covenant tested semiannually at 3.5x, with a current company-defined leverage of 1.7x as of December 2020 pro-forma for the Oil & Gas division disposal. The first half of the year is typically seasonally weaker in terms of cash flow generation (dividends, working capital).ESG CONSIDERATIONSThe company's tightened financial policy was an important consideration for this rating action. The tightened dividend and net leverage targets support Moody's metrics more commensurate with a Baa3.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSMoody's would consider upgrading the ratings if the company improves its scale while Moody's-adjusted debt/EBITDA falls sustainably below 2.5x and Moody's-adjusted retained cash flow/net debt rises sustainably above 30%. Concurrently, Moody's could downgrade the ratings if Moody's-adjusted debt/ EBITDA exceeds 3.5x for a prolonged period, if Moody's-adjusted retained cash flow/net debt falls below 20% for a prolonged period, or if Weir's liquidity position weakens, for example, because of looming maturities, shrinking flexibility under its net leverage covenant ratio (test level of 3.5x) or if free cash flow after capex, interest and dividends turns negative. LIST OF AFFECTED RATINGS Affirmations: ..Issuer: Weir Group Plc (The)....LT Issuer Rating, Affirmed Baa3....Senior Unsecured Bank Credit Facility, Affirmed Baa3....Senior Unsecured Commercial Paper, Affirmed P-3Outlook Actions:..Issuer: Weir Group Plc (The)....Outlook, Changed To Stable From NegativePRINCIPAL METHODOLOGYThe 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 mining and minerals end markets. For the 12 months ended December 2020, Weir generated revenue of GBP2.0 billion from continuing operations. Weir is a publicly listed company, and as of 25 April 2021, it had a market capitalisation of around GBP5.1 billion.REGULATORY DISCLOSURESFor 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.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. Tobias Wagner, CFA VP - Senior 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. 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