S&P revises Danfoss view downward

S&P said it revised the outlook for Danfoss A/S to negative from stable on the company’s pact to acquire from Eaton Corp. plc most of its hydraulic business for $3.3 billion, using debt.

“We believe Danfoss’ market reach and size could benefit from the acquisition, but we see a risk that volatility in earnings could increase and that profit margins could narrow to about 14%-15% in 2020-2021, from the 16% we expect for 2019, due to lower margins in the acquired business and some integration costs,” said S&P in a press release.

S&P rates Danfoss BBB. “Due to the debt on Danfoss’ balance sheet to fund the $3.3 billion acquisition of its new hydraulic business (about €4.0 billion in adjusted debt at deal closing), we believe ratings headroom has eroded. At year-end 2021, FFO to debt at 25% or above (then exceeding 30% from 2022) would be commensurate with the rating. We could lower our ratings on Danfoss if it does not achieve those levels,” S&P said.

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