OREANDA-NEWS. Fitch Ratings has affirmed its Issuer Default Rating (IDR) for Hillenbrand, Inc. (HI) at 'BBB-' following the announcement that it has agreed to acquire Red Valve Company, Inc. for $131.9 million. Fitch has also affirmed HI's senior unsecured credit facility (revolver and term loan) and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. Outstanding debt as of Sept. 30, 2015 was $528 million. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS
The acquisition of Red Valve, which produces specialized valves and other flow control solutions for water, waste water and industrial flow processes, furthers HI's penetration into the flow control industry. HI will pay $131.9 million for Red Valve, which is 10.9x its LTM EBITDA of $12.1 million.

The acquisition is expected to be financed with a draw on HI's revolver, which will cause HI's gross debt/EBITDA to increase to a pro forma level of around 2.5x from 1.8x at Sept. 30, 2015. Fitch expects leverage to move to the low-2x range at the end of fiscal 2016 (ended September) as the company uses free cash flow (FCF) to reduce borrowings on the revolver.

Fitch believes that HI could maintain a faster pace of acquisitions going forward, causing mid-cycle leverage to remain in the low-2.0x range. Leverage could move higher in connection with acquisitions, but Fitch anticipates an increase in leverage above the expected mid-cycle range would be reduced relatively quickly, as HI has shown the willingness and ability to pay down debt following leveraging transactions.

The ratings incorporate HI's financial flexibility, consistently positive FCF, conservative financial strategy, and broad customer and geographic base. Significant aftermarket revenue in the Process Equipment Group (PEG) generates attractive margins and mitigates the segment's cyclical end-markets and exposure to long-term projects. The Batesville segment provides additional stability, generating consistently strong EBITDA margins of around 25% and a substantial part of Hillenbrand's FCF.

Rating concerns include the potential for increased leverage and execution risk related to acquisitions, cyclical end-markets, operating risks associated with diversifying into adjacent product markets and geographies, and declining industry trends at Batesville. HI's acquisition strategy contributes to opportunities for operating synergies, but PEG's short operating history creates some uncertainty about its performance through economic cycles.

Fitch expects HI will generate mid-single-digit revenue growth and relatively steady EBITDA margins in fiscal 2016. Fitch expects FCF will improve to around $100 million, with capex estimated at 1.5%-2.0% of revenues and slightly increasing dividends. FCF will be used for acquisitions and a modest level of share repurchases.

KEY ASSUMPTIONS
Fitch's key assumptions within its rating case for HI include:

--PEG's revenues increase approximately 8% in fiscal 2016 due to the acquisition of Abel at the beginning of the fiscal year and the pending acquisition of Red Valve. Batesville declines 1%, representing the continued trend of increased cremations, fewer burials, and the increased life expectancy.
--EBITDA margins are relatively steady in fiscal 2016.
--Capital intensity remains in line at 1.5%-2.0% of revenues. Dividends grow slowly, and share repurchases are kept at modest levels, used only to offset stock option dilution.
--Debt/EBITDA increases from 1.8x at FYE 2015 to 2.2x - 2.3x at FYE 2016, with future movement in leverage depending on the pace of acquisitions.

RATING SENSITIVITIES
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Leverage (gross debt/EBITDA) moving above 2.25x on average over time; post-acquisition leverage may increase to 2.5x-2.75x with the expectation that short-term debt repayment would get leverage back down to below the average;
--FCF margin below 4%-6%;
--A sustained decline in the EBITDA margin to below 15%;
--Deterioration in Batesville's revenue and cash flow.

Positive: An upgrade of the issuer's ratings is unlikely in the near term given the risks associated with its acquisition growth strategy and cyclicality at PEG.

LIQUIDITY
Liquidity was adequate at Sept. 30, 2015 and included $48.3 million of cash and cash equivalents (of which $40.8 million was overseas) plus $578.8 million in borrowing capacity ($454.3 million immediately available per the leverage covenant) under Hillenbrand's revolving credit facility that matures in December 2019. Revolver availability will fluctuate with acquisition activity, but should be adequate, together with operating cash flow, to sustain the company's operations through cycles. Maturities over the next few years are minimal until the company's term loan and revolver mature in 2019.

FULL LIST OF RATING ACTIONS

Fitch affirms its ratings on Hillenbrand, Inc. as follows:

--IDR at 'BBB-';
--Senior unsecured revolving credit facility at 'BBB-';
--Senior unsecured term loan at 'BBB-';
--Senior unsecured notes at 'BBB-'.

The Rating Outlook is Stable.