At a time when companies are increasingly favoring shareholders, Ingersoll-Rand Plc is keeping bondholders happy by cutting $1 billion of its $3.6 billion of debt.
The maker of security systems and Trane air conditioners, rated Baa1 by Moody's Investors Service and BBB+ at Standard & Poor's, retired $345 million of notes this month and plans to repay $600 million of debt due in 2013. That would trim leverage to a level qualifying Swords, Ireland-based Ingersoll-Rand for A ratings, according to debt researcher CreditSights Inc.
The company is going against the shareholder-friendly trend as investment-grade yields hover at record lows, pushing many firms to fund stock repurchases with bonds. Net U.S. corporate debt rose every quarter in 2010 and 2011 to $7.8 trillion from $7.05 trillion, Federal Reserve data show. U.S. corporations executed $489 billion in stock buybacks last year, the most since the record $762 billion in 2007, according to data compiled by Westport, Connecticut-based Birinyi Associates Inc.
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Ingersoll-Rand is paying down obligations "to eventually get a single-A rating," said Anthony Valeri, a market strategist at LPL Financial in San Diego, which oversees $330 billion of assets. "That way they can refinance their debt. A quick look at their debt profile shows a lot of 6 percent-plus coupon bonds. That's way above the current market."
The difference between A and BBB rated yields reached 1.02 percentage points in February, the most since 2009, Bank of America Merrill Lynch index data show. Ingersoll-Rand bonds trade at an average 151 basis-point premium to similar-maturity Treasuries, closer to the 179 basis-point spread on A rated debt than the 255 basis points of BBB securities, the data show.
"Our balanced approach continues to strengthen our balance sheet and is important for long term stability and shareholder value," Misty Zelent, a spokeswoman for the company, wrote in an e-mail. "This capital allocation strategy enables the company to evaluate alternatives, including moving toward an increased rating."
Ingersoll-Rand's ratio of debt to earnings before interest, taxes, depreciation and amortization could fall to 1.2 times around the end of 2013 from the current leverage of 1.9, according to an April 22 note from Kristina Regan, an analyst for New York-based CreditSights. That would be "touching on A credit metrics" and would put the firm "in a more favorable position to refinance its 2014 debt maturity," she wrote.
Credit Crisis
The company has $655 million of 9.5 percent notes that come due in April 2014, Bloomberg data show. The debt traded April 17 at 115.2 cents on the dollar to yield 1.67 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Ingersoll-Rand lost A rankings in 2008 during the financial crisis. When Moody's cut its rating, it cited $4 billion of debt taken on in the $9.6 billion acquisition of Trane Inc. that June.
Company executives told analysts in March that in 2008 "they were sitting with $4 billion of short-term debt and dealing with refinancing needs during the credit crisis," and stronger-rated companies "were able to navigate that period more gracefully and even perform acquisitions," Regan said.
"Management conveyed at their analyst meeting that they never want to take liquidity for granted," Regan said in a telephone interview. "Ingersoll-Rand seems to be focusing on debt reduction to move up the credit spectrum so they don't have an issue when it comes to refinancing needs or if there was some other unforeseen crisis down the road."
CreditSights raised its rating on Ingersoll-Rand debt to the equivalent of "hold" in its report, saying "deleveraging the company's balance sheet to single A metrics has taken a priority to larger shareholder rewards like we have seen in the past."
Ingersoll-Rand had $1.16 billion of cash and near cash items at the end of 2011, up from $1.01 billion a year earlier, Bloomberg data show. The company repurchased 36 million shares in 2011 and now has 298.7 million outstanding, and it plans to buy as much as $400 million more in this year's second half.
Free cash flow, money that can be used for stock buybacks and dividends and for debt repurchases, is expected to be $1.1 billion this year, according to the CreditSights report.
"Their first priority has been buying back debt," said Edward Wheeler, a New York-based analyst with the Buckingham Research Group, who rates the shares a "buy." "Right now that's been their best choice," he said in a telephone interview.
Good Risk
Shares of the company rallied to $42.09 at 11:01 a.m. today in New York from $26.48 in October, when the European debt crisis roiled global markets. The stock dropped as low as $11.84 in March 2009 as the S&P 500 Index bottomed during the worst financial crisis since the Great Depression.
Ingersoll-Rand has a good risk profile "because of its good market and geographic diversity, a variety of segments with strong or major market positions, and products and services where we foresee meaningful recurring revenues," S&P said in a Feb. 13 note by analysts John Sico and Dan Picciotto in New York. S&P "believes they have the capacity and the cash on hand for debt repayment," Sico said in a telephone interview yesterday.
The main consideration for an S&P upgrade is "we want to see them not only attain the ratios but sustain them," he said.
"From our perspective, they have the flexibility to either repay or refinance the upcoming maturities," he said. "They do generate good free cash flow. What we expect is a balanced approach to capital allocation."
Bloomberg News
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