WATCH PRICE TARGET - SPX Corp SPW 7.625% 12/15/2014

download SPX Corp Credit Snapshot
 
SPX Corp. is a diversified industrial company with its global operations organized into four
segments:
Flow Technology
Test and Measurement
Thermal Equipment and Services
Industrial Products and Services. 
SPX's markets include Food and Beverage, Power and Energy, Process Industries,
Heating, Ventilating and Air Conditioning, General Industrial, and Transportation.
As a global multi-industry manufacturer they have operations in more than 40
countries and make revenues in more than 150 countries and focus on the
global infrastructure development market, which accounts for approximately
half of the company's revenues.
2008 revenues by segments:
The company is a leading provider of transformers, cooling towers, heat exchangers and
other industrial hardware for power and other infrastructure projects. 
Geographical split of 2008 revenues and LT-assets
SPX's markets are cyclical and were negatively impacted by the global economic slowdown
(f.i. the tools and diagnostics business is week because its dependence on the Auto sector)
with industrial segment backlog down 44% from its peak.
The 4% Sequential Increase in Backlog in Q2 09 was driven by foreign currency fluctuations
and dry cooling contracts in China.
 
 
Longer term business perspectives are dependent on energy demand and energy
infrastructure investment and SPX may benefit from its global diversification. However,
management is not optimistic that SPX will benefit from US stiumulus since investments
are mostly directed towards alternative energy.  
The company historically operates at a relatively low leverage multiple.
 
The company does pay dividends in a USD 52 to 73MM annual range. 
...and engages in stock repurchases (113MM in Q1 09)
SPX does acquisitions frequently with the most significant recent deal being APV PLC, UK which
was acquired in December 07 for GBP 250MM and contributed about USD 800MM in revenues. 
However, company management made a capital allocation commitment on July, 29th 2009
(its most recent Q presenation) to stay away from stock repurchases or acquisitions and to
reduce debt until they have reached a leverage multiple of 2x.
link to Q2 2009 presentations
 
 
Free cash flow guidance for 2009 is in the USD 230 to 270MM range (working capital improvements on
lower revenue outlook and lower cash taxes).
 
In the following are some links to most recent SPX Corp research notes. You
will need your own log-in and password to read it. If you don't have one don't
be depressed since the notes in general are not terribly informative. 
GS

JPM

Barclays
Boa I
Boa II
 
       
Investment Description: 
     
             
                     
Despite the low earnings visibility we are constructive on the 2014 notes as a long position
with a price target of 101.0 (+503bp vs TSY 2.35%) based on the following key points:

generation of free cash flow
 low leverage
strong liquidity position (projected to be 1bln by year-end 2009)
clear commitment to reduce debt

 
The interest payment dates for  these notes are June 15 and December 15. The notes are
redeemable,  in whole, or in part, at any time prior to maturity at a price equal to 100% of
the principal amount plus a premium, plus accrued and unpaid interest.  In addition, at any
time prior to December 15, 2010 SPX may redeem up to 35% of  the aggregate principal amount
of the notes with the net cash proceeds of  certain equity offerings at a redemption price of
107.625%, plus accrued and  unpaid interest. In case of a change of control transaction, SPX
must offer to repurchase the notes at 101% of the aggregate principal amount of the notes
repurchased, plus accrued and unpaid interest.The notes are unsecured and rank equally with
all existing and future  unsecured senior indebtedness, but are effectively junior to the senior
credit  facilities. The indenture governing the notes contains covenants that, among  other things,
limit the company's ability to incur liens, enter into sale and leaseback  transactions  and
consummate some mergers.
 

 
At December 31, 2008, SPX was in  compliance with all covenant provisions of these senior notes.
 

 
SPX has agreed to  conduct a registered exchange offer for the notes and will use commercially
reasonable efforts to exchange the notes for a new issue of identical debt  securities within 150
days from February 28, 2009, if the notes are not freely  tradable before this date, and file under
certain circumstances a shelf  registration statement to cover resales of the notes and to cause
the  registration statement to be declared effective by the SEC. If they fail to  satisfy these obligations,
they have agreed to pay additional interest to holders  of the notes under certain circumstances.
 

 
SPX has a $2.26 billion (originally $2.3 billion) senior secured credit facility consisting of a $600
million revolving credit facility, $712 million (originally $750 million) term loan and $950 million
Foreign Credit Instrument Facility. All of these facilities mature September 21, 2012. The credit
facility is secured by 100% of all material domestic subsidiary stock and 65% of the company's
major foreign subsidiaries' stock. All borrowings are guaranteed by SPX's domestic subsidiaries
and SPX will guarantee all foreign subsidiary borrowings.
 

 
The credit facility has a springing lien if the corporate family rating is rated Ba2 or less (or
withdrawn) by Moody's and BB or less (or withdrawn) by S&P. The revolving credit facility is used
for working capital and letters of credit needs. It could be used for the company's stock repurchase
program. The term loan amortizes 10% per annum with a bullet payment at maturity. The Foreign
Credit Instrument Facility is used to support SPX's foreign operations and may be utilized for the
issuance of performance letters of credit and other forms of bank undertakings. The senior secured
credit facility also benefits from priority of claims it has in relation to the company's $549 million in
senior unsecured notes. 
 
  

 
The 2014 notes are junior to the obligations of the $2.26 billion senior secured credit facility.
The unsecured notes are pari passu to each other and are the most junior capital within SPX's
capital structure.
 
  

SPX maintains a $130 million accounts receivable program, which is annually renewable. 
Noticeable liabilities include an underfunded pension- and underfunded post retirement plan
at USD 303MM and USD 148MM respectively. An operating lease adjustment at 8x annual
rental results in a USD 412MM debt equivalent.
 
Covenants:
Leverage 3.25x
Coverage 3.5x

Liquidity as per 6/09:
 
At the end of Q2 SPX had USD 435MM in cash and USD 325.9 of availability under the
revolver and USD 274.3 of  available issuance capacity under our foreign trade facility. 





        
         
 
        
Catalysts/Key Risk Factors: 
                                       
Q3 announcement: on October 29th, 2009
 
Risk Factors:
Economic environment
Change in financial policy
Acquisitions 
Stock repurchases
Foreign exchange
Raw material costs
Competition
Litigation
Accounting
...
Disclaimer: D your own work and do not to rely upon this short write-up which
just represents a personal view and is no recommendations to buy or sell any securities.