Stanley Black & Decker Inc. Outlook Revised To Negative On Potential Effects From The Coronavirus And Elevated Leverage

  • We believe the U.S. and Europe will enter a recession in 2020 and anticipate that consumer discretionary spending will decline sharply, much of which will coincide with Stanley Black & Decker Inc.'s important summer selling season for its core tools and storage segment.
  • The company is acquiring Boeing 737 MAX supplier Consolidated Aerospace Manufacturing LLC (CAM) for $1.2 billion.
  • Stanley has made more than $5 billion of acquisitions since 2017, which has increased its adjusted debt to EBITDA slightly above our 2x downgrade threshold for the last two years.
  • We are revising our outlook on the company to negative from stable.
  • The negative outlook indicates that Stanley's debt-funded transactions and subsequent profit disruptions could keep its adjusted debt to EBITDA above 2x for a third consecutive year absent corporate actions to reduce its leverage.
TORONTO (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions above. Stanley's debt leverage has remained persistently high, mostly due to its acquisitions in recent years. The outlook revision incorporates our weaker profit outlook for the company in 2020, which will exacerbate its already elevated debt leverage. Our downside scenario reflects the concurrent effects of its debt-financed acquisitions and an unexpected downturn, which we anticipate will reduce its earnings and cash flow in 2020. We previously expected the company's steady free cash flow and transparent capital allocation to enable it to manage its debt load and maintain fully adjusted debt to EBITDA of about 2x as of the end of 2020. However, this was before market conditions sharply deteriorated due to the coronavirus pandemic and other factors. We estimate that a 10% decline in Stanley's EBITDA for 2020 would increase its debt to EBITDA to the 2.5x-3.0x range, which view as high for the 'A' rating.
The negative outlook indicates that our downside scenario is materializing quickly. Specifically, we anticipate that Stanley's debt-funded transactions and subsequent profit disruptions may cause its adjusted debt to EBITDA to remain above 2x for a third consecutive year absent corporate actions to reduce its leverage. We estimate that the company's leverage may even rise above 2.5x in 2020 given the rapidly deteriorating economic outlook.
We could lower our rating on Stanley if we expect its debt to EBITDA to remain above 2x as of the end of 2020 and see limited prospects for improvement in 2021. We believe that we could confirm such an outcome by autumn 2020 given the uncertain market conditions in Western Europe and North America and their consequent effect on the company's free cash generation as well as the inherently deleveraging effect of its hybrid securities, which mature in 2020.
We could revise our outlook on Stanley to stable if it improves its adjusted debt to EBITDA to the 1.5x-2.0x range in 2020, which has been our long-standing threshold for the current rating. Such a scenario could occur due to an unexpectedly quick rebound in demand after the second quarter that enables the company to generate sufficient free cash flow to support deleveraging.
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