A recent research publication disclosed Metso’s issuer rating. As a result, Scope converts the status of Metso’s issuer rating from subscription to public and releases the associated rating rationale below.

On 20 December 2019, Scope Ratings had placed Metso’s BBB+ issuer rating under review for a possible downgrade through the following announcement:

Scope places Metso's BBB+ issuer rating under review for a possible downgrade

Metso has announced the demerger of its minerals business and its combination with Outotec. Scope anticipates a markedly weaker business risk profile for Neles (the succesor company) compared to Metso in its current form.

Rating action

Scope Ratings has placed Metso Corporation’s BBB+ issuer rating under review for a possible downgrade¹.

Rating rationale

Metso announced plans to demerge its minerals business and combine it with Outotec. As a result, Metso will become a pure-play flow control company with revenues of around EUR 600m and operate under the name of Neles. The deal is expected to close in the second quarter of 2020. In Scope’s view, the separation of the minerals business is likely to weaken Neles’ business risk profile compared to that of Metso in its current form (currently rated BBB-). This is due to: i) a serious deterioration in Neles’ market position; ii) Neles’ less diversified product portfolio; and iii) Neles’ lower share of recurring revenues from aftermarket business (22% compared to around 56% at Metso). Metso’s flow control business is more profitable than its minerals business. The demerger will therefore result in higher profitability for Neles compared to Metso in its current form. Scope calculates a pro-forma EBITDA margin of 14%-16% for Neles over the past three years versus the 10%-13% EBITDA margin reported for Metso. However, Neles’ higher profitability will be not sufficient to compensate for its weaker market position and lower diversification. Scope sees Neles’ business risk profile at up to three notches below the BBB- rating for Metso in its current form.

Metso has provided selected financial carve-out information for its continuing flow control operations. According to this information, Neles’ internal cash flows are sound, with free cash flow of around EUR 60m in 2018 (and around EUR 50m in the first nine months of 2019). Moreover, Neles has a strong pro-forma balance sheet, with a pro-forma net cash position of EUR 45m as of 30 September 2019. Scope has no visibility on Neles’ future financial policy and funding structure, but will review the company’s financial risk profile as soon as the relevant information is communicated. Scope may consider an upgrade of its current A rating for Neles’ financial risk profile if the company’s pro-forma net cash position proves sustainable. This would partially compensate for its weaker business risk profile.

At this stage, Scope believes that Neles could maintain a low-end investment grade rating if a continuation of Metso’s conservative financial policy is communicated. A possible downgrade would be limited to two notches, provided that Metso’s conservative approach is applicable.1

¹Editor’s note: This paragraph was edited for purposes of the public release on 21 February 2020.

Cash flow analysis and Stress testing
Scope performed its standard cash flow forecasting for the company. No stress testing was performed.

Methodology
The methodology used for this rating and rating outlook (Corporate Methodology) is available on www.scoperatings.com.
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The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rating was not requested by the rated entity or its agents. The rated entity and/or its agents did not participate in the rating process. Scope had no access to accounts, management and/or other relevant internal documents for the rated entity or related third party.
The following substantially material sources of information were used to prepare the credit rating: public domain and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst: Gennadij Kremer, Associate Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 30 August 2018.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings.

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