(The following statement was released by the rating agency)

Overview

-- U.K.-based engineering company Invensys PLC has agreed to

divest its rail division for GBP1.7 billion in the financial year ending March

31, 2014.

-- We believe that the divestment, together with Invensys' use of part of

the proceeds to significantly reduce its pensions deficit, will materially

improve its credit metrics.

-- We are therefore revising our outlook on Invensys to positive from

negative, and affirming our 'BBB-' long-term corporate credit rating on the

company.

-- The positive outlook reflects the one-in-three chance of an upgrade

over the 24-month horizon, assuming Invensys achieves credit metrics in line

with a 'modest' financial risk profile and its business risk profile remains

'satisfactory' despite the reduced business diversity coming from the disposal

of the rail division.

Rating Action

On Nov. 30, 2012, Standard & Poor's Ratings Services revised its outlook on

U.K.-based engineering company Invensys PLC to positive from negative. At the

same time, we affirmed our 'BBB-' long-term corporate credit and issue ratings

on the company.

Rationale

The outlook revision reflects our view that Invensys' credit metrics will

materially strengthen following the disposal of its rail division for GBP1.7

billion and the partial use of the proceeds to reduce its pensions deficit in

the financial year ending March 31, 2014 (financial 2014).

As part of the transaction, Invensys reached an agreement with the trustee of

its U.K. pension scheme for a long-term solution to the funding of its pension

plan. In accordance with this agreement, Invensys will make an up-front

payment of GBP400 million toward the deficit and reserve a further GBP225

million

in a trust for future payments if needed. In addition, Invensys will make an

immediate GBP625 million payment to its shareholders. The rest of the proceeds

will be kept by the company to finance future growth of the remaining

business. This may include acquisitions, which we estimate would not exceed

GBP150 million annually over a three-year period.

We believe that the reduction in pension contributions will support Invensys'

cash flow generation. In addition, the company's exit from large rail-related

projects may be beneficial for working capital management.

Under our base-case scenario, we estimate that Invensys will post revenues of

about GBP2.4 billion in financial 2013 and GBP1.8 billion in financial 2014. We

anticipate that Invensys' Standard & Poor's-adjusted EBITDA margin in these

years will be in the range of 7.5%-8.5%, compared with 8.2% in financial 2012,

including rail. We do not anticipate a material change in adjusted debt by

March 31, 2013, from the GBP690 million Invensys posted on Sept. 30, 2012. This

leads us to estimate funds from operations (FFO) to debt at 30% in financial

2013. With the transaction taking place in the course of financial 2014, we

calculate that Invensys will reach a net cash position on a fully adjusted

basis by March 31, 2014, assuming that acquisition-related spending does not

exceed GBP150 million per year, in line with management's indications.

We believe that the disposal of the rail division reduces business diversity,

may result in a decline of the group operating margin on revenues in the short

term, and may reinforce Invensys' exposure to economic cycles. That said, pro

forma for the transaction, Invensys will continue to benefit from satisfactory

end-market and geographic diversification as well as growing exposure to

emerging markets. We also anticipate that the company's announced strategy of

focusing on high-growth segments and high-margin products, combined with a

restructuring program to reduce overheads, should help to restore

profitability measures over the medium term.

We continue to assess Invensys' business risk profile as 'satisfactory,'

albeit weakened by the reduction in diversity and long-term visibility of the

earnings in rail. An additional weakness, in our view, stems from high

execution risks relating to an increase in the contribution of emerging

markets to revenues and the early stage of large contracts in the company's

systems business.

We maintain our view that the company's large installed customer base and

strong and integrated customer relationships pose material barriers to entry

for competitors. We believe that Invensys' strong positions in niche markets

support new customer gains, leading to stable revenue generation capacity.

These strengths are offset by Invensys' exposure to fragmented, highly

competitive, and cyclical industries, where it mainly competes with larger

companies.

We currently assess Invensys' financial risk profile as 'intermediate.' This

is supported by Invensys' strong liquidity position, which offers an

additional cushion against adverse market conditions. Large postretirement and

legacy liabilities weighing on asset-protection credit metrics pose the main

constraint to the company's financial risk profile, in our opinion. We could

revise our financial risk profile assessment to 'modest' under our criteria

when the transaction closes, as long as Invensys makes scheduled payments in

line with its announced plan and avoids raising additional debt. This would

also likely require us gaining greater visibility of the company's financial

policy over the medium term.

Liquidity

We assess Invensys' liquidity as 'strong' under our criteria. We consider

Invensys' liquidity profile to be supported by the company's policy of

maintaining ample cash on its balance sheet, the absence of financial debt due

for repayment, and what we view as proactive treasury management.

Our base-case liquidity assessment is based on the following factors and

assumptions:

-- We anticipate that the company's sources of liquidity (including

operating cash flows, surplus cash balances, and available/committed bank

financing) will exceed uses (capital spending and contracted cash outflows in

respect of restructuring, pension fund payments, and other obligatory

payments) by at least 1.5x over the next two years.

-- Liquidity sources will continue to exceed uses, even if EBITDA were to

decline by 30%.

-- The company appears to have good relationships with its lenders.

-- We understand that Invensys was in compliance with its financial

covenants as of Sept. 30, 2012, and we anticipate that the company will be

able to manage the covenant tests in the next 24 months.

On Sept. 30, 2012, Invensys' liquidity position was supported by GBP176 million

in cash and liquid assets, and GBP250 million undrawn from its new GBP250

million

revolving credit facility (RCF), part of the two-tranche GBP600 million facility

that expires in March 2017. The GBP600 million facility is subject to material

adverse change clauses and an incurrence financial covenant on leverage. This

compares positively with negligible short-term debt obligations of GBP1 million

on the same date.

Outlook

The positive outlook reflects our view that there is a one-in-three chance

that we could raise the ratings if Invensys completes the rail division

disposal and reduction in pension liabilities in line with its announced

strategy. Adjusted debt reduction with the proceeds from the disposal should

allow the company to maintain adjusted FFO to debt of at least 45% in

financial 2014 and beyond under our base-case scenario.

We consider FFO to debt of about 30% in financial 2013 as commensurate with

the 'BBB-' rating. We could raise the rating if Invensys sustainably achieves

FFO to debt of at least 45% in 2014 and thereafter. Restored profitability,

positive free cash flow generation, and the absence of any new contract

delivery issues will also be important factors for any positive rating action.

We could revise the outlook to stable if Invensys fails to maintain an EBITDA

margin of 7.5%-8.5% on a fully adjusted basis in financial 2013 and after the

transaction is complete. We could also revise the outlook to stable if the

company experiences a prolonged period of negative free operating cash flow

generation. Additional cost overruns, technological or management issues

relating to project execution, or a downward revision of our business risk

profile assessment of the company could also lead us to consider revising the

outlook to stable.

Related Criteria And Research

All articles listed below are available on RatingsDirect on the Global Credit

Portal, unless otherwise stated.

-- Key Credit Factors: Criteria For Rating The Global Capital Goods

Industry, April 28, 2011

-- Management And Governance Credit Factors, March 12, 2012

-- Methodology And Assumptions: Liquidity Descriptors For Global

Corporate Issuers, Sept. 28, 2011

-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,

2012

Ratings List

Ratings Affirmed; CreditWatch/Outlook Action

To From

Invensys PLC

Corporate Credit Rating BBB-/Positive/-- BBB-/Negative/--

Senior Unsecured Debt BBB- BBB-

(Caryn Trokie, New York Ratings Unit)

Keywords:

(Caryn.Trokie@thomsonreuters.com; 646-223-6318; Reuters Messaging: rm://caryn.trokie.reuters.com@reuters.net)

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