Johnson Controls’ senior unsecured ratings upgraded to Baa1 by Moody’s

Investing.com -- Moody’s Ratings has upgraded Johnson Controls (NYSE:JCI) International plc’s senior unsecured ratings to Baa1 from Baa2 while affirming its P-2 commercial paper program ratings. The ratings outlook has been changed to stable from positive.

The upgrade reflects Moody’s expectation that Johnson Controls will maintain its improved EBITDA margin and stronger cash generation, with debt/EBITDA ratio around 2.5x. Moody’s also expects favorable demand in the company’s commercial heating and air conditioning (HVAC) and building controls businesses to support multi-year growth.

The Baa1 senior unsecured rating is supported by Johnson Controls’ significant scale with diverse customer base and end markets in commercial HVAC and building controls and solutions. The company’s product portfolio is enhanced by a large service offering that adds revenue and reduces volatility.

Moody’s identifies Johnson Controls as a leader among major participants in the global building equipment market. The ratings agency expects demand for the company’s products to remain resilient and margins to improve as the company focuses on its core businesses following the expected near-term divestiture of its Residential and Light Commercial (R&LC) HVAC businesses.

The ratings agency projects that earnings growth will improve the company’s debt/EBITDA to the mid-2x range in 2026.

These positive factors are balanced against a softer global macroeconomic growth environment and tariff-related challenges, though Moody’s does not expect these to significantly impact the company. The agency believes that positive pricing actions, operating efficiencies and supply chain initiatives will help Johnson Controls manage tariffs and inflationary cost pressures.

Moody’s notes some operational execution risk as the company completes the pending divestiture of its R&LC businesses.

The stable outlook indicates Moody’s expectation that Johnson Controls will maintain a balanced capital allocation policy with debt/EBITDA around 2.5x. The company’s mid-single digit order growth and $14 billion backlog provides strong revenue visibility for the coming year.

The ratings could be upgraded if Johnson Controls demonstrates a well-balanced financial policy with debt/EBITDA improving to and maintaining around 2.5x, EBITDA margin above 15%, and strong cash generation.

Conversely, the ratings could face downgrade if the company encounters operational execution issues after selling its R&LC businesses, shifts to a more aggressive financial policy that increases debt/EBITDA above 3.0x, or if operating performance weakens with EBITDA margin below 13%.

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