Moody's revised its outlook on Minnesota-based Ecolab Inc.'s ratings to positive from stable, citing the company's "strong track record" of expanding its portfolio through M&A and organic growth.
It also affirmed its ratings on the company's senior unsecured notes at Baa1.
The rating agency expects Ecolab's spinoff of its upstream energy business to strengthen margins and enhance margin stability in the company's remaining portfolio. Ecolab provides water, energy and other services to industries including healthcare, food and hospitality.
It also anticipates continued growth in revenues and EBITDA, helping offset the impact on leverage from the said spinoff and future M&A activity.
As of Sept. 30, Ecolab's adjusted leverage was close to 2.4x, or 2.6x pro forma for the separation of upstream energy. Net M&A activity has averaged about $450 million per year over the last five years, according to Moody's.
Meanwhile, the rating agency warned against risks arising from Ecolab's M&A spree, which it said occasionally stresses the company's balance sheet.
Moody's could upgrade Ecolab's ratings if the company continues to target net unadjusted leverage at 2.0x, while retained cash flow to debt is maintained above 25%.
However, the ratings could be downgraded if Ecolab targets higher unadjusted net leverage, among other factors.