Fitch Places American Axle's Ratings on Negative Watch Following Metaldyne Acquisition Announcement

CHICAGO--()--Fitch Ratings has placed the ratings of American Axle & Manufacturing Holdings, Inc. (AXL) and its American Axle & Manufacturing, Inc. (AAM) subsidiary on Rating Watch Negative. This includes the 'BB' Long-Term (LT) Issuer Default Ratings (IDRs), as well as AAM's secured revolving credit facility (RCF) and senior unsecured notes ratings. The rating action follows today's announcement that AXL will acquire Metaldyne Performance Group Inc. (MPG) in a cash and stock transaction.

AAM's ratings apply to a $523.5 million secured RCF and $1.35 billion in senior unsecured notes. A full rating list follows at the end of this release.

KEY RATING DRIVERS

AXL plans to fund the transaction using a combination of cash, incremental borrowing and stock. Including the incremental borrowing, Fitch estimates the combined company will have about $4.1 billion in debt at closing compared to AXL's existing debt level of $1.4 billion. Including transaction synergies, Fitch estimates that the combined company's pro forma EBITDA will exceed $1 billion, leading to estimated pro forma EBITDA leverage in the mid-3x range, well above AXL's standalone leverage of 2.3x at June 30, 2016. AXL has stated that following the closing, it plans to de-lever to a net leverage target of about 2x by 2019. However, in the interim, leverage will be significantly higher than that contemplated in Fitch's recent upgrade of AXL's IDR to 'BB'. Fitch expects take a rating action on AXL at the time the transaction closes, and it could downgrade AXL's IDR by one to two notches.

AXL's acquisition of MPG will significantly enhance the diversity of AXL's book of business, which has been a key part of the AXL's strategy in the post-recession period. For example, the company estimates that driveline components will comprise less than 50% of its book of business following the acquisition, down from about 90% today. In addition to adding powertrain and other light vehicle components to AXL's existing driveline business, the acquisition will accelerate the company's drive to reduce concentration in its customer base. In particular, the company estimates that the portion of its business derived from General Motors Company will decline to about 32% by 2020 from 66% in 2015.

Although the transaction will grow and diversify AXL's business, there are also important risks associated with it. Merging both companies' sizeable operations could lead to integration issues and higher-than-expected integration costs. It could also delay the attainment of the expected synergies or reduce the potential synergies of the transaction. The acquisition will also result in a notable increase in AXL's medium-term leverage, which is significant, given the cyclicality of the auto industry. A decline in global auto production, particularly in North America, could hinder AXL's ability to de-lever its balance sheet as planned. The change in ownership, which will result in American Securities owning the largest equity stake in the combined company, also adds another element of uncertainty about the credit profile. Although there are mitigants to each of these issues, they nonetheless increase the intermediate-term risk to the company's operating and credit profiles.

The acquisition combines AXL's driveline business with MPG's diversified light vehicle product offerings. AXL will acquire MPG through a cash and stock offer, offering MPG shareholders $13.50 in cash plus 0.5 share of AXL common stock for each share of MPG common stock, equating to a total equity consideration of about $1.6 billion. Including about $1.7 billion of net debt at MPG, the enterprise value for the transaction equates to approximately $3.3 billion or about 6.8x MPG's estimated 2016 adjusted EBITDA. The companies estimate that various synergies will result in $100 million to $120 million in run-rate profit improvement by year-end 2018, and including those synergies, the company estimates the transaction multiple would be 5.5x. AXL and MPG expect to close the transaction in the first half of 2017 (1H17). At closing, current MPG shareholders will own about 30% of the combined company. Included in this, MPG's controlling stockholder, American Securities LLC, will own about 23% of the combined company.

The Recovery Rating of 'RR1' assigned to AAM's secured RCF reflects its collateral coverage, which includes virtually all the assets of AXL and AAM, leading to expected recovery prospects in the 90% to 100% range in a distressed scenario. The 'RR4' assigned to AAM's senior unsecured notes reflects Fitch's expectation that recovery prospects would be average, in the 30% to 50% range, in a distressed scenario.

KEY ASSUMPTIONS

--AXL completes the acquisition of MPG in 1H17;

--U.S. light vehicle sales run in the low- to mid-17 million range in 2016, and global sales rise in the low-single-digit range;

--After 2016, U.S. industry sales plateau at around 17 million, while global sales continue to rise modestly in the low-single-digit range;

--Debt rises to $4.1 billion at the close of the transaction, but the company uses FCF to reduce debt over the next several years;

--The company keeps around $250 million in consolidated cash on hand.

RATING SENSITIVITIES

Positive: With the likelihood of a substantial increase in leverage following the MPG acquisition, Fitch does not expect to upgrade AXL's ratings in the intermediate term.

Negative: Completion of the acquisition of MPG according to the current terms will likely lead to a downgrade of AXL's ratings.

Fitch has placed the following ratings on Rating Watch Negative:

AXL

--IDR 'BB'.

AAM

--IDR 'BB';

--Secured revolving credit facility rating 'BB+/RR1';

--Senior unsecured notes rating 'BB/RR4'.

Summary of Financial Statement Adjustments: Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)

https://www.fitchratings.com/site/re/885629

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1014309

Endorsement Policy

https://www.fitchratings.com/regulatory

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Contacts

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Eric Ause
Senior Director
+1-312-606-2302
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Eric Ause
Senior Director
+1-312-606-2302
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com