A recent research publication disclosed ABB’s issuer rating. As a result, Scope converts the status of ABB’s issuer rating from subscription to public and releases the associated rating rationale below.

On 5 April 2019, following the announced sale of the Power Grids business to the Hitachi Corporation, Scope had affirmed ABB’s A- issuer rating. The Outlook was changed to Negative from Stable. The announcement was as follows:

Scope affirms issuer rating of A- for ABB Ltd, Outlook Negative¹

The change in Outlook follows the announced sale of Power Grids and the intention to distribute all cash proceeds to shareholders. It also reflects the significantly increased net leverage and a lack of clarity as to how ABB plans to reduce it.

Rating action

Following the announced sale of the Power Grids business to the Hitachi Corporation, Scope has affirmed ABB’s A- issuer rating. The Outlook has been changed to Negative from Stable.²

Rating rationale

The sale of the Power Grids business has meant a significant loss in EBITDA (around USD 1bn), while the impact on debt has been rather limited. Based on numbers which have been deconsolidated for the Power Grids business, Scope calculates Scope-adjusted debt/EBITDA (SaD/EBITDA) of 2.4x at year-end 2018. This is a substantial increase compared to 1.2x net leverage calculated at year-end 2017.

Scope projects that SaD/EBITDA will remain within the 2.0-2.5x range at year-end 2019F, mainly due to anticipated restructuring, transaction and separation costs. Going forward, Scope believes that the company will succeed in bringing its leverage down to around 2.0x, in particular due to higher EBITDA. The extent of the improvement will depend on how the company delevers its balance sheet (e.g. whether it uses proceeds from the sale of the Power Grids business or divestments). Scope notes that expected discretionary cash flow (free cash flow after dividends) in 2019F and 2020F will not be sufficient to achieve significant deleveraging in the medium term.

ABB has reaffirmed its intention to maintain a ‘single A’ credit rating in the long term. An essential condition for this is lower leverage. While we believe that ABB has options to deleverage its balance sheet, a clear strategy is lacking. In particular, it is not fully evident what ABB plans to do with the cash proceeds from the sale of the Power Grids business. The company has announced that it intends to return 100% of the estimated net cash proceeds of USD 7.6bn-USD 7.8bn from the sale of its 80.1% stake to shareholders through share buybacks or similar mechanisms. This announcement came as a surprise given the severe negative impact it would have on net leverage and the company’s track record of fairly conservative balance sheet management. However, it is Scope’s understanding that this 100% distribution is not set in stone and will also depend on the balance sheet situation at the time. In this context, we note that the company did not complete its share buyback programme announced in 2016 due to other capital allocation priorities. Scope believes that ABB will use its cash flow to bring its leverage down.

At the same time, low expected discretionary cash flow means that this approach will take a long time to reduce net leverage. Another option would be the divestment of some parts of the business.

Scope considers ABB’s liquidity and financial flexibility to be ‘more than adequate’ based on its corporate rating methodology. ABB’s liquidity at end-December 2018 included: i) cash on the balance sheet of USD 3.4bn; ii) short-term marketable securities in the amount of USD 712m; and iii) a multi-currency revolving credit facility in the amount of USD 2.0bn which will mature in 2021. This credit facility was wholly unutilised at year-end 2018. In addition to these liquidity sources, ABB has two commercial paper programmes in place with an amount of USD 3.5bn available at year-end 2018. All in all, available liquidity is sufficient to cover short-term debt payments of USD 2.0bn.

Rating-change drivers

Scope may change the rating Outlook back to Stable if ABB’s SaD/EBITDA improves to within a 1.5-2.0x range. A clear, coherent strategy with regard to deleveraging and/or clarity with regard to the use of proceeds from the sale of the Power Grids business may also lead to an improved Outlook.

Scope may upgrade its rating if ABB’s SaD/EBITDA improves to around 1.0x on a sustainable basis.
A negative rating action may be warranted if the company’s SaD/EBITDA remains higher than 2.0x on a sustainable basis and/or if ABB returns 100% of the Power Grids proceeds to shareholders without any compensating effects.

¹Editor’s note: This paragraph was edited for purposes of the public release on 21 February 2020
²Editor’s note: This paragraph was edited for purposes of the public release on 21 February 2020

Cash flow analysis
Scope performed its standard cash flow forecasting for the company.

Stress testing
No stress testing was performed.

Methodology
The methodology used for this rating and rating outlook (Corporate Methodology Feb 2019) is available on www.scoperatings.com.
Historical default rates of the entities rated by Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.
Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the rating process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain, Scope internal sources, third parties.
“Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.”
“Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.”

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Gennadij Kremer, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 20.06.2018.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

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