OREANDA-NEWS. S&P Global Ratings today said that it assigned its 'B+' corporate credit rating to Columbus, Ohio-based Cortes NP Acquisition Corp. (d/b/a Vertiv). The outlook is stable.

We also assigned our 'B+' issue-level rating and '3' recovery rating to the company's proposed $2.285 billion first-lien term loan maturing in 2023, indicating our expectation for meaningful recovery (upper half of the 50%-70% range) in the event of a payment default.

The company will use the proceeds along with anticipated additional debt and equity funding to purchase an 85% equity stake in the company from Emerson Electric Co., which will be owned by Platinum Equity, and to pay fees and expenses. Emerson Electric will retain the remaining 15% minority interest in the business.

The 'B+' corporate credit rating reflects the company's high pro forma leverage, which is somewhat offset by its good market position, moderate scale, and well-established customer base. We expect adjusted total debt to EBITDA of about 5.6x pro forma for the transaction and for this metric to exceed 5.0x through fiscal-year 2017 (ending Sept. 30). Operating performance in fiscal 2015 was challenged by reduced telecom spending in China, wage inflation, and translational foreign-exchange effects. We expect year-over-year revenue decline of about 3% in fiscal 2016 coupled with some profitability improvement. In fiscal 2017, we expect adjusted EBITDA margin will continue to improve modestly to the mid-teens in light of modest growth and operational initiatives.

With sales of nearly $4.5 billion in 2015, Cortes NP Acquisition Corp. (d/b/a Vertiv) primarily manufactures power and thermal management equipment and provides services for data and communication centers, and also makes products and software for commercial/industrial use.

Our assessment of Cortes' business benefits from this scale, long-standing customer relationships that average about 20 years among its top 10 customers, and low customer concentration (top 10 customers account for about 15% of total sales). However, Cortes competes with large, well-capitalized companies including Eaton and Schneider, and we believe the market is relatively competitive. Additionally, we believe its ability to execute on operational initiatives as a stand-alone company comes with inherent execution risks. Further, its heavy concentration in the data and communication center end markets (61% and 21% of revenue, respectively) exposes the company to cyclical fluctuations and potential shifts in customer demand. Still, the near-term fundamentals for the data center business support some growth.

Our base-case forecast assumes:Low single-digit revenue growth in fiscal 2017, as we estimate average GDP growth of about 2.5% for the regions in which Cortes generates revenue (North America, Europe, Asia Pacific, and Latin America).Adjusted EBITDA margin expected to be about 13% at fiscal 2016 year-end and to improve to 14%-15%, benefitting from planned operational initiative. Capital spending at about $50 million. Based on these assumptions, we arrive at the following credit measurers:Pro-forma debt to EBITDA of about 5.6x for fiscal 2016, improving toward 5x by fiscal year-end 2017.Decent free operating cash flow (FOCF) of about $100 million over the next year. We note the majority ownership by financial sponsor Platinum Equity and expect the company will pursue modest acquisition activity in the future. Our ratings incorporate the potential for re-leveraging events over time.

We expect Cortes to maintain adequate liquidity over the next 12 months. We estimate that the company's sources of liquidity will be at least 1.2x its uses, and that its net sources will remain positive even if its forecast EBITDA declines 15%. The qualitative factors related to Cortes' liquidity support our adequate assessment. For example, high anticipated leverage and low initial cash and FOCF would likely require some refinancing for the company to absorb a low-probability, high-impact event, and the planned covenant-lite, secured term loan is indicative of satisfactory standing in credit markets.

Principal Liquidity Sources:Ample availability under an anticipated revolver. More than $150 million in annual funds from operations. Principal Liquidity Uses:Capital expenditures of about $50 million. Modest working capital outflows. Modest debt amortization. Our stable outlook reflects the expectation that modest growth and operational initiatives will result in improvement in EBITDA margins and pro forma fiscal 2017 debt-to-EBITDA improving toward 5x.

We could lower the rating if credit measures deteriorate, such as sustained adjusted debt-to-EBITDA to 6x or more. This could occur if, for instance, the company fails to achieve positive revenue growth and margins deteriorate by 200 bps. Margin deterioration could occur if the company fails to achieve planned savings through operational initiatives, and this could also lead us to negatively reassess the company's business risk.

Although unlikely in the next 12 months, we could raise the rating if Cortes improves its credit measures such that leverage decreases to less than 5x and we expect credit measures to be maintained at this level. This would require strong evidence that the sponsor will pursue a less aggressive financial policy.