Fitch Upgrades Tenneco's IDR to 'BB-'; Rates New Unsecured Notes Due 2018 'B+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Tenneco Inc.'s (TEN) Issuer Default Rating (IDR) to 'BB-' from 'B+'. In addition, Fitch has upgraded TEN's senior unsecured notes to 'B+', and Fitch now rates TEN's new unsecured notes due 2018 'B+'.

Fitch has taken the following rating actions on TEN:

--Issuer Default Rating (IDR) upgraded to 'BB-' from 'B+';

--Senior secured revolving credit facility affirmed at 'BB+';

--Senior secured term loan B affirmed at 'BB+';

--Senior secured tranche B-1 letter of credit/revolving loan facility affirmed at 'BB+';

--Senior secured second lien notes affirmed at 'BB';

--Senior unsecured notes upgraded to 'B+' from 'B-/RR6';

--New senior unsecured notes rated 'B+';

--Subordinated notes upgraded to 'B' from 'B-/RR6'.

In accordance with Fitch's published methodology, the Recovery Ratings (RR) on all issues for TEN will no longer be published.

The Rating Outlook is Stable. On a pro forma basis, approximately $1.2 billion of debt outstanding is covered by these ratings.

The upgraded ratings are supported by reduced leverage, increases in profits, healthy liquidity, the improved automotive environment, and no near-term debt maturities once the second lien notes are called. EBITDA and margins have significantly improved over the last few quarters on improved global light vehicle production and successful cost cutting initiatives at the company.

The ratings are also driven by TEN's strong liquidity position and the outlook for significant revenue growth over the next several years. This is due to expectations for higher light vehicle production globally and new opportunities for sales to commercial vehicles, which TEN has forecasted will be a significant addition to original equipment (OE) revenues going forward. Furthermore, during 2009 the company took restructuring actions to increase operating efficiencies and enhance margins as already demonstrated in recent quarters. Fitch believes the free cash flow (FCF) outlook has also improved, although absolute cash flow levels are still relatively low due to working capital investments.

The Stable Outlook is driven by Fitch's view that the company's credit profile has improved sufficiently to withstand weaker industry conditions if they were to develop, although Fitch's current industry outlook is for continued production growth. A Positive Outlook may be warranted if global vehicle production shows stability and if the company can generate positive free cash flow more consistently.

Concerns remain centered on revenue concentration in Europe given Fitch's outlook for vehicle production to fall 8%-12% in 2010 in the region. Europe, South America and India accounted for 48% of TEN's sales in 2009 and 40% in the second quarter of 2010. Other concerns include the company's underfunded pension plan, which in the U.S. was only 58% funded at year-end 2009 or $142 million underfunded. Foreign pension plans were 79% funded or $71 million underfunded. TEN plans to contribute $54 million to the global pension plans in 2010. There is also the possibility that working capital requirements may negatively impact free cash flow as a result of significant revenue growth.

TEN plans to refinance the $245 million of senior secured second lien notes with the new $225 million of senior unsecured notes. The unsecured notes will rank pari passu with the existing $250 million unsecured notes due in 2015. Fitch will withdraw the rating on the senior secured second lien notes once they have been successfully redeemed. Today's rating actions are based on the assumption that all of the second lien notes are called.

With the new notes, TEN continues to push back debt maturities. The redemption of the 2013s will also result in the extension of the revolver's maturity date. The $622 million revolver extends until March 2012 and includes a $50 million accordion. In March 2012, $66 million of commitments will expire and the remaining commitments of $556 million will extend until May 2014.

Liquidity at the end of 2Q'10 was $821 million which consisted of $146 million of cash on the balance sheet and $675 million on the revolving credit facilities after accounting for $25 million of borrowings and $52 million of letters of credit. In addition, the company has two U.S. accounts receivable programs which can be used up to $150 million. At the end of the recent quarter, none of the accounts receivable program was utilized versus $127 million at the end of the prior quarter (the receivables are treated as debt on the balance sheet effective as of Jan. 1, 2010 according to accounting rules). TEN also has European accounts receivable programs which benefit the company's liquidity position; some of these European programs can be cancelled with 90 days notice and some can be cancelled with notice of 15 days or less. At the end of 2Q'10, TEN had $105 million on its European receivables programs. These facilities are not treated as debt on the balance sheet.

Leverage at the end of the second quarter of 2010 was 2.43 times (x) which is a full turn better than leverage of 3.4x at the end of 2009. Free cash flow has been negative in two of the last four years. In 2009, free cash flow was $121 million largely driven by lower capital expenditures. For the latest 12 months ending with the second quarter of 2010, free cash flow was $131 million. TEN has made efforts to better manage working capital needs which may benefit results as capital needs grow with revenues. In 2010, the company plans to spend $160 million on capital expenditures to support future growth. In 2009, spending for capital expenditures was $120 million; in 2008 it was $233 million.

The concern regarding sales concentration to Europe is mitigated by TEN's somewhat diverse sales mix. Sales to the original equipment manufacturers accounted for approximately 78% of sales and aftermarket sales contributed 22% to the top line in 2009. Furthermore, Fitch believes that material new wins, particularly in the non-automotive area, should provide solid top-line growth over the next several years in the event of continued weakness in automotive production.

Over the longer term, TEN's position in the emissions segment positions the company well to expand its customer base and volumes. Also over a longer time horizon, product demand should increase given plans for tighter emission standards and expected growth in revenues and profits that should come from TEN's migration to more technological, value-added products which should also support margins.

Applicable criteria are available at 'www.fitchratings.com' and specifically include:

--'Corporate Rating Methodology' (Nov. 24, 2009)

--'Rating Automotive Supply Companies: Sector Credit Factors' (June 8, 2010).

Additional information is available at www.fitchratings.com.

Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018

Rating Automotive Supply Companies: Sector Credit Factors

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=513345

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