Silver II Borrower S.C.A. -- Moody's assigns B2 CFR to Silver II Borrower (Hamilton Sundstrand Industrial buyout)

New York, November 28, 2012 -- Moody's Investors Service has assigned a B2 corporate family rating to Silver II Borrower S.C.A., which together with Silver II US Holdings, LLC (co-borrowers), have been formed to fund the $3.44 billion acquisition of Hamilton Sundstrand Industrial (HSI) by BC Partners and The Carlyle Group. Concurrently, Moody's assigned a B1 rating to the proposed $1.85 billion senior secured credit facilities and a Caa1 rating to the proposed $775 million senior unsecured notes. The rating outlook is stable.

HSI consists of the Milton Roy, Sundyne and Sullair industrial product businesses of United Technologies Corporation (UTC). Moody's views the acquisition of HSI as expensive at approximately 10.2x trailing EBITDA, before fees and expenses, and the pro forma capital structure as aggressive with roughly $2.3 billion of debt, 7.0x initial debt-to-EBITDA, and $1.3 billion of sponsor equity.

The following ratings have been assigned (subject to review of final documentation):

B2 corporate family rating (CFR);

B2 probability of default rating;

B1 (LGD 3, 34%) to the proposed $300 million first lien revolver due 2017;

B1 (LGD 3, 34%) to the proposed $1,550 million first lien term loan due 2019; and

Caa1 (LGD5, 87%) to the proposed $775 million senior unsecured notes due 2020.

RATINGS RATIONALE

The B2 CFR reflects HSI's aggressive leverage profile and reduced financial flexibility relative to many of its larger competitors in the globally fragmented pump and industrial air compressor markets. These factors are balanced against HSI's high margins, leadership position of its niche products, well-recognized brands, dependable aftermarket revenue base, and solid cash generating capabilities through the industrial cycle.

HSI's businesses are positioned to benefit from its solid end-market and geographic diversification, a global distribution network and manufacturing footprint and limited customer concentrations. HSI's pump and compressor products are primarily sold into oil and gas production, chemical and hydrocarbon processing, general industrial, construction, mining and water/wastewater treatment end-markets and should benefit from modest growth prospects and varying long-term investment needs across these sectors. However, these sectors are cyclical in nature and will result in earnings volatility over time. Underpinning the B2 rating is Moody's expectation that HSI will generate substantial free cash flow during the up-cycle, which will initially be used to repay debt, and sufficient free cash flow through the downturn, in part due to the unwind of working capital, to meet debt service requirements.

HSI has steadily improved margins through the last downturn benefitting from growing demand trends following the trough of the last recession, restructuring efforts completed in Europe, growth in emerging markets and a flexible cost structure. HSI's margins benefit from outsourcing of key component part manufacturing and sub-assemblies and its ongoing focus on low cost country sourcing for raw materials and component parts. Moody's expects HSI to maintain low-single digit sales growth in 2013 which should allow for margins to remain at high levels despite heightened risks associated with its separation from UTC.

The B2 CFR benefits from a good post acquisition liquidity profile bolstered by an expectation for meaningful cash generation, a $300 million undrawn revolver, and minimal financial covenant restrictions. We expect HSI to generate cash flows well in excess of its heavy interest burden (roughly $140M-$150M), term loan amortization requirements ($15.5M) and capital spending needs thus allowing for discretionary debt reduction. Financial covenants are expected to be limited to a net first lien leverage test, only if revolver borrowings exceed 25% of availability.

The B1 rating on the revolver and term loan reflect their seniority in the capital structure relative to the notes and a first lien security interest in the assets of the guarantors (roughly 50% of total assets). The Caa1 rating on the notes reflects their junior position in the capital structure relative to the first lien facilities.

The stable rating outlook reflects Moody's expectation for modest earnings growth, solid cash generation and debt reduction to result in a reduction in financial leverage and an overall improvement in credit protection metrics over the next year.

The ratings are unlikely to be upgraded prior to meaningful debt reduction such that leverage is reduced and can be expected to be maintained around 5.0x through the industrial cycle. Conversely, ratings would likely be downgraded if free cash flows were used to fund meaningful acquisitions or shareholder returns prior to debt reduction. We would view leverage maintained above 6.5x for an extended period to be inconsistent with the B2 rating. Further, any meaningful reliance on the revolver would increase the likelihood of a negative rating action.

The principal methodology used in rating Silver II Borrower S.C.A.was the Global Manufacturing Industry Methodology published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Silver II Borrower S.C.A., together with Silver II US Holdings, LLC (co-borrowers), is comprised of the former Hamilton Sundstrand Industrial business of United Technologies Corporation. The business designs, manufactures, sells and services the aftermarket for a broad portfolio of sealed and sealless pumps, metering pumps, gas compressors, stationary and portable compressors and air ends. The company is owned by private equity sponsors BC Partners and The Carlyle Group. Sales for the twelve months ending September 30, 2012 were approximately $1.4 billion.

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Brian GrieserAsst Vice President - Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653Michael J. Mulvaney MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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