Investing.com -- S&P Global Ratings has revised its outlook for MRC Global (NYSE: MRC ) (US) Inc. to positive from stable, citing a more conservative financial policy and a lower leverage forecast. The company’s adjusted debt to EBITDA is expected to remain below 2.5x when demand for its products is strong, preventing leverage from exceeding 5x for more than a year during a cyclical downturn in demand.
The ’B’ rating on MRC and its $350 million term loan has been affirmed, with no changes to the ’4’ recovery rating or the expected average recovery of 40% in the event of payment default.
MRC Global adopted a more conservative financial policy in 2024, reducing its S&P Global Ratings-adjusted debt to $580 million, down from $750 million to $1 billion in the period 2018-2023. This resulted in a decrease in adjusted debt to EBITDA to 2.4x in 2024, compared to more than 3x in the five years prior.
The company is expected to finance acquisitions and shareholder rewards with free operating cash flow, with an anticipation of higher shareholder returns over the next three years. The size of the term loan, due in 2031, is viewed as potentially supportive of a higher rating. However, debt-financed shareholder rewards or acquisitions could change expectations for adjusted leverage through the cycle and prevent a rating increase.
Cash generation is expected to partially offset leverage increases during a downturn. The company would need to repay debt to deleverage. It is noted that adjusted FOCF to debt was more than 5% in four of the past five years, with a forecast of S&P Global Ratings-adjusted FOCF of $75 million in 2025 and above $100 million in 2026.
Demand for MRC’s products will remain cyclical, with gas utilities representing the largest share of revenue at 37%, compared with 24% five years ago. Multi-year investment in infrastructure maintenance and upgrades is expected to result in stable demand for this segment over the next three years.
Oil and gas production is the largest driver of this cyclicality, with the production, transmission, and infrastructure (PTI) segment accounting for 31% of revenue last year. Performance in this segment will fluctuate with exploration and drilling activity in North America.
Lease liabilities, which amounted to $193 million in 2024, increase S&P Global Ratings-adjusted leverage. As a result, S&P Global Ratings-adjusted debt to EBITDA was 2.4x in 2024, compared with 1.6x on a management-adjusted basis. The company’s target leverage of below 1.5x is viewed as consistent with maintaining S&P-Global Ratings-adjusted leverage of 2.5x during periods of solid end market demand and 5x through the cycle.
MRC is expected to manage tariff exposure effectively, with solid demand allowing the company to pass through price increases with limited impact on volumes.
S&P Global Ratings notes a high degree of unpredictability around policy implementation by the U.S. administration, particularly regarding tariffs, and the potential effect on economies, supply chains, and credit conditions worldwide.
A successful ERP implementation is expected to demonstrate solid operating performance, improving internal controls and providing MRC with better visibility into its operations.
The positive outlook reflects the expectation of a possible rating increase over the next year if MRC continues to demonstrate a commitment to maintaining this leverage and solid operating performance.
The outlook could be revised back to stable if the company does not effectively address operating challenges like tariffs and its ERP implementation, or if financial policy leads to a rise in S&P Global Ratings-adjusted debt to EBITDA above 5x.
Conversely, the rating could be raised if the company successfully manages operating challenges and maintains S&P Global Ratings-adjusted debt to EBITDA below 5x throughout the commodity cycle.
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