Fitch Rates Kennametal's New Sr. Unsecured Debt 'BBB'; Outlook Stable

Fitch Rates Kennametal's New Sr. Unsecured Debt 'BBB'; Outlook Stable | Bild: © ad-hoc-news

Fitch estimates leverage will increase to approximately 1.2 times (x) upon issuance. This ratio is still consistent with the rating. However, Fitch expects leverage will decline toward 1x by fiscal year-end due to incremental EBITDA and anticipated debt reduction. Debt/EBITDA at Dec. 31, 2011 was approximately 0.6x.

In January 2012, KMT announced an agreement to acquire Deloro Stellite Group (Deloro Stellite) for approximately EUR277 million (approximately $355 million). The expected close of the transaction was within approximately 60 to 90 days from the date of announcement.

Kennametal's ratings reflects the company's leading market share in both its Industrial and Infrastructure segments, and strong presence in emerging markets. In addition, the company has a solid liquidity position and expected stable cash flow generation. Free cash flow (cash flow from operations less capital expenditures and dividends) should improve compared to fiscal 2011. Higher working capital requirements and capital spending will likely partially offset any anticipated improvement in operating results. Free cash flow in fiscal 2011 was $108 million.

The Outlook reflects the anticipated slowing growth in fiscal 2012 revenues compared to the prior year. Revenues increased by over 27% in fiscal 2011. Increased demand in multiple key end-markets, particularly general engineering, should continue to drive higher sales for Kennametal during the current fiscal year.

There is some risk regarding the integration of the Deloro Stellite acquisition. Fitch believes the company's recently completed restructuring actions have positioned Kennametal to be able to focus on efficiently incorporating the acquisition. Other rating concerns include exposure to cyclical end-markets and rising commodity prices. Offsetting these concerns is the company's historical ability to adjust to rising commodity prices, its commitment to strategic objectives regarding expansion into emerging markets, and maintaining a high level of new-product introductions each year.

Kennametal's liquidity at Dec. 31, 2011 included $129 million of cash plus full availability of its $600 million bank revolver, offset by $306 million of short-term debt and current maturities. Fitch views Kennametal's cash requirements after capital expenditures and dividends as manageable. After the repayment of debt in June, the company will have no debt maturing until 2022, a revolver that does not mature until 2016. The company's domestic pension plan was fully funded at the end of fiscal 2011.

Fitch rates Kennametal as follows:

--Issuer Default Rating (IDR) 'BBB';

--Senior unsecured bank facilities 'BBB';

--Senior unsecured debt 'BBB'.

Approximately $308 million of debt was outstanding at Dec. 31, 2011.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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