An ambitious restructuring plan has brought the Swedish-Swiss engineering group a more positive credit rating, which in turn is translating into a healthier order book. However, unsettled asbestos claims remain a large blot on the landscape, says Geraldine Lambe.

When Swedish-Swiss engineering group ABB broke even in the first quarter – and with CEO Juergen Dormann saying he expects the company to be back in the black this year – it indicated that the company is reaping the benefits of its ambitious restructuring plan at the end of 2003.

ABB’s more positive outlook is reflected in its credit default swap spreads. In November last year, when the three-part capital strengthening plan was carried out (consisting of a $2.5bn rights issue, a $1bn loan from 12 relationship banks and a e650m bond issue), its CDSs were trading at around 275 basis points over Libor; now, according Credit Market Analysis (CMA) they have tightened to 197.5. CMA data reveals that ABB still trades much wider than its sector competitors, however.

Increased confidence

According to Mark Wade, executive director and credit analyst at Lehman Brothers in London, ABB’s stronger liquidity is helping to calm anxieties about the company’s long-term future.

“Following ABB’s refinancing package towards the end of last year, investor and customer concerns over the company’s liquidity began to recede and its order book began to grow. People are becoming far more positive about ABB’s ability to grow its cash earnings.

“To a certain extent, Q4, and clearly in Q1, there has been increasing evidence that its core divisions, Power Technology and Automation Technology, have potential to grow. This also allows ABB to be in a less distressed state around its disposals; it is now able to gain more reasonable valuations.”

Rating agency Moody’s is certainly taking a more up-beat stance towards the company’s long-term debt, upgrading its senior unsecured and issuer ratings to Ba2 from B1, and the senior implied rating from Ba3 to Ba2 in mid-May.

Moody’s says the upgrades are based on the expectation of rising earnings and material free cash flows in the core businesses, which would strengthen key cash flow measures by the end of the 2005. Moody’s says that it has also factored in the company’s exit strategy from various businesses and the sustained reduction in gross debt levels, allocating part of the free cash flows and divestment proceeds to maturing debt obligations.

Mr Wade says that the company’s promised debt reduction should be achievable. “ABB is still a relatively leveraged company – with its pension liability [of $1.6bn] and quite a high level of securitised leases to think about. But it is also continuing to target reduction in its debt levels and these plans seem quite feasible.”

There are still hurdles to get over, though. Mr Wade says that progress must be made with settling its asbestos claims. “While the company has clearly improved matters at the operating level, it still has a problem in the lack of an exit from its US asbestos liabilities. There is a hearing planned this month [June], and it is hoped that this will conclude the situation, but closure has been said to be imminent for some months. Without full closure on asbestos liabilities, I can’t see that either rating agency will raise ABB’s rating any further.”

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