Fitch Rates Delphi's Proposed Notes 'BBB-'
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BBB-' to Delphi Corporation's (Delphi) proposed $500 million in senior unsecured notes due 2024. The IDRs for Delphi and its ultimate parent, Delphi Automotive PLC (DLPH) are 'BBB-'. The Rating Outlook for both DLPH and Delphi is Positive.
The proposed notes will be guaranteed on a senior unsecured basis by DLPH and certain other parent companies of Delphi. Delphi intends to use proceeds from the new notes to repay in full its $500 million in 5.875% senior unsecured notes due 2019 and for other general corporate purposes. In addition to shifting a significant maturity five years further into the future, Fitch expects the refinancing of the 2019 will reduce the company's interest expense, as the proposed notes are likely to carry a lower coupon.
KEY RATING DRIVERS
DLPH's ratings reflect the auto supplier's strong market position in the electrical, infotainment, safety, powertrain and thermal product categories. The highly-engineered nature of many of its products and its low-cost manufacturing footprint have combined to drive margins that are strong for the auto supply the industry and solidly positive free cash flow (FCF), even after the company instituted a dividend in 2013. In addition, DLPH's product portfolio, which is primarily focused on safety, emissions and communications technologies, has positioned the company to take advantage of important growth trends in the global auto industry, which Fitch expects will contribute to revenue growth above the rate of underlying vehicle production over the intermediate term. Other drivers of DLPH's ratings include a strong liquidity position, low leverage and limited pension obligations.
Rating concerns include the cyclical nature of the global auto industry, volatile raw material costs, and DLPH's significant exposure to the European auto market. Mitigating these concerns are the diversification of the company's business across geographies and customers and its flexible operating model, which has positioned much of the company's manufacturing capacity in low-cost countries. Other concerns include the company's somewhat acquisitive nature and its significant cash returns to shareholders, although its strong cash liquidity and FCF suggest that most of these activities can be accomplished without a meaningful increase in leverage. Overall, Fitch views DLPH as well positioned to manage through the cyclical challenges of the global auto supply industry and expects it would perform well, operationally and financially, through an industry downturn.
DLPH's credit profile is relatively strong for the auto supply sector. EBITDA leverage (debt/Fitch-calculated EBITDA) at year-end 2013 was 1.0x, with $2.4 billion in debt and full-year EBITDA of $2.4 billion. Funds from operations (FFO) adjusted leverage was 1.7x at year-end 2013. The company's liquidity at year end included $1.4 billion in cash and cash equivalents and nearly full availability on its $1.5 billion unsecured revolver. Short-term debt and current maturities totaled only $61 million at year end 2013, and the company has no significant debt maturities until 2018, when $403 million comes due. Going forward, Fitch expects leverage to remain low as the company's strong operating cash flow will provide it with the ability to fund capital investments, dividends, share repurchases and any potential acquisitions without the need for significant incremental long-term borrowing.
FCF in 2013 was $857 million, leading to a FCF margin of 5.2% that was relatively strong for an auto supplier. Funds flow from operations (FFO) was a robust $1.7 billion in 2013, while working capital added a modest $37 million to the company's operating cash flow, and capital expenditures were $682 million. DLPH's public guidance is for cash flow before financing in 2014 to be about $1.1 billion, in line with the 2013 figure, despite capital spending rising to approximately $800 million. Overall, Fitch expects DLPH to produce solidly positive FCF over the intermediate term despite an expected rise in capital spending and dividends, which will further enhance the company's financial flexibility.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Maintaining leverage in the low 1.0x range;
--Continuing to produce strong FCF, with a FCF margin above 5%;
--Generating consistent EBITDA margins of 15% or higher.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--An unexpected sharp decline in global auto production;
--A decline in the company's EBITDA margins to below 10%;
--An acquisition that results in an increase in leverage to above 2.0x for an extended period;
--An increase in long-term debt to support shareholder-friendly activities.
Fitch currently rates DLPH and Delphi as follows:
Unsecured term loan rating 'BBB-';
Unsecured revolving credit facility rating 'BBB-';
Senior unsecured rating 'BBB-'.
The Rating Outlook is Positive.
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).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage