Fitch Rates Meritor's Proposed Notes 'B-/RR5'
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'B-/RR5' to Meritor, Inc.'s (MTOR) proposed $225 million in senior unsecured notes due 2024. MTOR's Issuer Default Rating (IDR) is 'B' and the Rating Outlook is Stable.
The proposed notes will be guaranteed on an unsecured basis by each of MTOR's current and future subsidiaries that also guarantee the company's secured credit facility. MTOR intends to use proceeds from the new notes to redeem its remaining secured term loan debt, as well as fund the redemption of a portion of its 10 5/8% senior unsecured notes. As of Dec. 29, 2013, $41 million in borrowings remained outstanding on the term loan and the principal balance of the 10 5/8% notes was $250 million.
KEY RATING DRIVERS
MTOR's ratings reflect the company's relatively strong market position as a supplier of axles and brakes to the highly cyclical capital goods sector. Although credit protection metrics have weakened over the past two years as the global truck and industrial equipment markets have slumped, the work that MTOR has undertaken to improve its profitability has begun to show results. However, despite this improvement, MTOR's margins remain relatively low for the capital goods industry. Looking ahead, the company's M2016 strategy has laid the foundation for a number of initiatives that could improve MTOR's financial flexibility over the next two years by increasing sales, growing margins, and reducing balance sheet obligations.
The rating of 'B-/RR5' on MTOR's senior unsecured notes reflects Fitch's expectation that recovery would be below average, in the 10% to 30% range, in a distressed scenario. This lower level of expected recovery is due, in part, to the substantial amount of higher-priority secured debt in MTOR's capital structure, including the potential for full draws on both its secured revolver and its U.S. accounts receivable securitization facility.
Despite weak market conditions, MTOR continues to have solid financial flexibility. The company's liquidity position at Dec. 29, 2013 included $300 million in cash and cash equivalents, full availability of $429 million on its secured revolver (although availability stepped down to $415 million in January 2014 when one bank's commitments expired), and a full $100 million of availability on its receivables securitization facility. Cash obligations tied to debt maturities are minimal until FY2015, when $84 million in notes comes due.
Free cash flow (FCF) in the 12 months ended Dec. 29, 2013 was ($60) million, but this included $54 million in voluntary pension contributions and $33 million in cash taxes tied to the sale of the company's 50% interest in its Suspensys Sistemas Automotivos Ltda. (Suspensys) joint venture. FCF in FY2014 is likely to be pressured by continued market weakness, but it is likely to be substantially improved from FY2013. Notably, following the voluntary pension contributions made in FY2013, MTOR is not expected to have any required contributions to its U.S. qualified and U.K. pension plans in FY2014.
As of Dec. 29, 2013, the face value of MTOR's debt stood at $1.2 billion. Fitch-calculated EBITDA in the 12 months ended Dec. 29, 2013 was $227 million, leading to Fitch-calculated leverage (debt/Fitch-calculated EBITDA) of 5.2x. EBITDA interest coverage was 1.8x. Fitch expects MTOR's credit protection metrics to improve modestly in FY2014 on a slight EBITDA increase, as margins grow on roughly flat revenue. The de-levering objective in the M2016 plan suggests that the company will look for additional opportunities to reduce its debt over the next three years.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--A decline in leverage to below 4.0x for a sustained period;
--An ability to produce positive free cash flow on a consistent basis;
--An increase in margins as a result of restructuring actions.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A material further deterioration in the global commercial truck or
industrial equipment markets;
--An extended period of negative operating cash flow that substantially reduces the company's liquidity;
--An unexpected acquisition that leads to an increase in leverage;
--An increase in debt to fund shareholder-friendly activities.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage (Aug. 5, 2013);
--Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (Nov. 19, 2013);
--Evaluating Corporate Governance (Dec. 12, 2012);
--Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (Dec. 23, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis