Moodys Upgrades Invensys plc's Corporate Family Rating To Ba3 From B1; Stable Outlook

Moodys Upgrades Invensys plc's Corporate Family Rating To Ba3 From B1; Stable Outlook

Approximately GBP 1,140 million of rated debt affected


Moodys Investors Service has today concluded its review of Invensys Plc ("Invensys" or "the company") and upgraded the corporate family rating to Ba3 from B1 following the expected repayment of around GBP 410 million of net debt using proceeds from a GBP 341 million rights issue and from the anticipated closing of the sale of Invensys Building Systems ("IBS") in the US and Asia Pacific to Schneider Electric SA for GBP157m. Concurrently Moodys has upgraded ratings on senior notes at Invensys Plc to B2 from B3 and withdrawn ratings of the senior secured and second lien facilities at Invensys International Holdings Ltd. The outlook for the ratings is stable.

Moodys views the company’s actions as reducing credit risk, with benefits being a simplified capital structure, lower future funding costs and enhanced financial flexibility. Lower absolute debt levels have resulted in improved credit metrics which are now consistent with a Ba3 corporate family rating. The company’s improved performance for 2006 has been a factor in the ratings action but divisional results have been patchy. A sustainable operating performance will be needed to maintain ratings.

The ratings and outlook factor the company’s positive market positions and strong brands, together with its demonstrated access to equity capital markets and willingness to reduce leverage by raising equity. Ratings also consider exposure to cyclical industries, compounded by strong competition and gearing levels. Credit metrics could change rapidly with cyclical movements. Off-setting these risks is the company’s diversification across geographies and industry sectors and a material component of sales generated from on-going service, maintenance and spares.

Revision of the capital structure is also seen as a measure to counter the company’s challenges in operating performance. Moodys cautions that whilst absolute debt levels will materially reduce and management of legacy liabilities (including pensions, litigation, taxation, environmental and transition costs) have been in line with expectations, the underlying operating performance of its divisions has been mixed.

The historical operating performance, combined with the burden of reducing legacy liabilities and high interest costs has strained internally generated cash flows. The debt reduction is a positive step toward improving cash flows which have been negative after interest, tax and repayment of legacy liabilities. The company’s on-going operational performance and cash flow generation will be key ratings drivers.

Liquidity is considered acceptable for the rating. Around GBP 250 million of headroom is expected to be available under new GBP 700 million senior secured credit facilities after the capital restructure subject to compliance with covenants and MAC clause. The cash balance is also expected to be around GBP 130 million excluding restricted deposits and once proceeds from the IBS sale are applied to debt reduction. Cash flow generation will be key to the future liquidity position.

The company will need to continue its positive momentum and demonstrate sustainable operating performance to maintain the Ba3 rating. A track record of improved operating performance would be needed before upward pressure on ratings could occur.

The following ratings are affected:

Invensys plc

- corporate family rating upgraded to Ba3 from B1;

- rating of the senior notes due 2007, 2010 and 2011 upgraded from B3 to B2.

Invensys International Holdings Ltd

- Ba3 rating of the GBP 1.35 billion senior secured credit facilities due 2009 withdrawn;

- B1 rating of the Euro 150 million & US$ 300 million second lien facilities due 2009 withdrawn.

Headquartered in London, England, Invensys is a leading global automation, controls and process solutions group. For the twelve months ended 31 March 2006, Invensys reported total revenues from continuing operations of approximately GBP 2.53 billion.