Fitch Upgrades American Axle's IDR to 'BB-'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) of American Axle & Manufacturing Holdings, Inc. (AXL) and its American Axle & Manufacturing, Inc. (AAM) subsidiary to 'BB-' from 'B+'. Fitch has also upgraded AAM's senior unsecured notes rating to 'BB-' from 'B/RR5'. Fitch has affirmed the ratings for AAM's secured revolving credit facility and secured term loan A at 'BB+'. A full list of the rating actions taken on AXL and AAM follows at the end of this release. AAM's ratings apply to a $523.5 million secured revolving credit facility, a $146.3 million term loan A and $1.35 billion of senior unsecured notes. The Rating Outlook for both AXL and AAM is Stable.
KEY RATING DRIVERS
The upgrade of the IDRs for AXL and AAM is supported by the fundamental improvement in the drivetrain and driveline supplier's credit profile over the past several years. AXL continues to benefit from strong pickup truck and sport-utility vehicle (SUV) production at its largest customer, General Motors Company (GM), while it also continues to diversify its overall book of business. Sales of the company's EcoTrac disconnecting all-wheel drive (AWD) system, offered initially on Chrysler Group LLC's (Chrysler) Jeep Cherokee, have been strong, and the system's roll-out on Chrysler's 2015 model year 200 sedan will support sales further. AXL's margins have risen back toward their historically strong levels, among the strongest in the U.S. auto supply industry, although margins are likely to decline somewhat over time as its business becomes more diversified. Consistent with Fitch's expectations, the company has improved its profitability and strengthened credit profile following weakness caused by launch issues with two product programs a couple of years ago. In the time since then, the company has launched a number of new programs without any notable production issues.
Looking ahead, Fitch continues to expect AXL's business to become further diversified, which will lessen the company's outsized reliance on GM's U.S. light truck production. Passenger car, crossover, and commercial vehicle programs will comprise an increasing proportion of the company's revenue, while a growing list of global customers will reduce the concentration of the company's customer base. AXL's backlog of new business launching between 2014 and 2016 currently stands at $900 million, 65% of which is for passenger car and crossover programs and 34% is for programs outside North America. By mid-decade, AXL expects about half of its revenue base to come from non-GM programs (including Chinese joint venture sales). It is notable, however, that the company's exposure to the continued weak European market remains small, with only about 4% of its 2013 revenue generated in the region.
Fitch's concerns include the continued concentration of AXL's revenue base, despite the increased diversification; the potential for operational issues to arise with the substantial amount of launch activity expected over the intermediate term, much of it with new customers; and the sensitivity of the company's credit metrics to changes in its operating performance. Although Fitch expects AXL to continue diversifying its book of business, GM is likely to remain the company's largest customer by a wide margin for a number of years. In addition, AXL is likely to remain heavily exposed to any production volume changes in GM's light truck program. A decline in demand for GM vehicles, especially its light trucks, would have a significant impact on AXL's financial performance. At the same time, new product launch activity, especially with new customers, increases the risk of potential startup issues. Although AXL smoothly launched a number of programs over the past year, launch issues in late 2012 and early 2013 had a material effect on the company's credit profile. Fitch also notes that AXL's credit protection metrics are quite sensitive to fluctuations in the company's operating performance, and a steep decline in production or potential launch issues could lead to a rapid deterioration in its overall credit profile.
Free cash flow (FCF) (calculated as net cash from operations less gross capital expenditures) in the 12 months ended June 30, 2014, was $38 million. Although this equated to a FCF margin of only 1.1%, the company was able to produce positive FCF in three of the last four quarters. This was a substantial turnaround from the 12 month period ended June 30, 2013, when the company's FCF was ($403) million, pressured by a number of non-recurring items, including $225 million of pension contributions. Capital spending of $234 million in the 12 months ended June 30, 2014 was relatively high, equal to 6.8% of revenue, as the company made additional investments to support GM's light truck program. After 2014, Fitch expects the company's capital expenditures to fall back to a more typical level of about 4.5% of annual revenue. Fitch expects AXL to produce FCF of at least $50 million in 2014, and beyond 2014, FCF could increase by $100 million or more on a normalization of capital spending, further operating cost performance and continued working capital management.
AXL's overall liquidity remains adequate to meet the company's cash needs. Cash and cash equivalents at June 30, 2014, totaled $129 million, $50 million higher than at June 30, 2013, and AAM had $502 million available on its $523.5 million secured revolver. In September 2013, AAM amended its secured credit facility, which included upsizing its revolver to the current level from $365 million. The company has no meaningful debt maturities due until 2018 when AAM's secured Term Loan A comes due. AAM's Term Loan A, which had $146 million outstanding at June 30, 2014, was entered into as part of the 2013 credit facility amendment. Overall, Fitch expects AXL's cash and revolver availability to remain more than sufficient to cover the company's liquidity needs over the intermediate term.
AXL's leverage (debt/Fitch-calculated EBITDA) declined during the 12 months ended June 30, 2014, to 3.2x from 4.8x in the year-earlier period as EBITDA increased and debt remained roughly flat. Overall, Fitch-calculated EBITDA rose to $487 million in the 12 months ended June 30, 2014 from $323 million in the year-earlier period, while debt was about $1.5 billion at the end of both periods. Fitch expects leverage to continue trending downward over the intermediate term as the company looks for opportunities to reduce debt and as EBITDA grows on higher business levels. Fitch expects leverage to remain in the low-3x range at year-end 2014 and potentially decline below 3x by the end of 2015.
Fitch no longer views the funded status of AXL's defined benefit pension plans as a significant credit risk. At year-end 2013, the plans were 94% funded on a projected benefit obligation (PBO) basis, equating to only a $42 million net liability. A combination of higher interest rates and the substantial contribution made to the plans in 2012 contributed to the improvement in the plans' funded status over the past several years. By way of comparison, at year-end 2011, AXL's pension plans were only 62% funded with a $275 million net liability. As a result of the plans' funded status, Fitch does not expect AXL to have any required contributions to the U.S. plans over the intermediate term.
Consistent with its 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers', Fitch has affirmed AAM's secured revolving credit facility and secured Term Loan A ratings at 'BB+'. The recovery rating of 'RR1' has been withdrawn, as Fitch does not assign recovery ratings to issuers with IDRs of 'BB-' or higher. Concurrently, Fitch has upgraded AAM's senior unsecured notes rating by two notches to 'BB-' from 'B/RR5'. At the 'BB-' IDR level, secured issue ratings are typically one to two notches above the IDR, while unsecured ratings are typically rated at the same level as the IDR. The rating of 'BB+' on AAM's secured revolver and Term Loan A reflects their collateral coverage, which includes virtually all the assets of AXL and AAM. The two-notch upgrade of AAM's senior unsecured notes incorporates Fitch's expectation that the company's improved financial performance would lead to average recoveries in a distressed scenario.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Continued progress on diversifying the company's revenue base.
--Sustained positive FCF.
--A decline in EBITDA leverage to below 3x for a sustained period.
--Sustained EBITDA margins of 12% or higher.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Significant production inefficiencies and associated cash burn tied to the start-up of new programs.
--A rise in EBITDA leverage to above 3.5x for a sustained period.
--A sustained decline in the EBITDA margin to below 10%.
--Sustained negative FCF.
--An unexpected prolonged disruption in the production of GM's full-size pickups and SUVs.
Fitch has taken the following rating actions with a Stable Outlook:
--Issuer Default Rating (IDR) upgraded to 'BB-' from 'B+'.
--IDR upgraded to 'BB-' from 'B+';
--Secured revolving credit facility rating affirmed at 'BB+';
--Secured Term Loan A rating affirmed at 'BB+';
--Senior unsecured notes rating upgraded to 'BB-' from 'B/RR5'.
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' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage