CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'BB' to Tenneco Inc.'s (TEN) $225 million in proposed senior unsecured notes due 2024. A full list of TEN's ratings follows at the end of this release.
KEY RATING DRIVERS
TEN intends to use proceeds from the proposed notes to fund the tender offer for its existing $225 million in 7.25% senior unsecured notes due 2018. TEN announced the tender offer and a consent solicitation on Nov. 20, 2014. The consent solicitation expires on Dec. 4, 2014 and the tender offer expires on Dec. 19, 2014. The proposed notes will be guaranteed by TEN's wholly-owned domestic subsidiaries that also guarantee the company's secured revolving credit facility and Term Loan A.
TEN's ratings continue to be supported by the company's market position as a top global supplier of emission control and vehicle suspension components, with a strong presence in both the original equipment and aftermarket segments. In addition, tightening regulations in a number of countries governing commercial truck and off-highway vehicle emissions have led to increased growth opportunities and higher profitability. In general, TEN's credit profile is characterized by declining, but somewhat volatile, leverage and strong liquidity. However, free cash flow margins are relatively low. In general, TEN's lowered cost structure and strengthened balance sheet has improved its ability to withstand an unexpected downturn in global demand.
Primary risks to the company's credit profile include industry cyclicality, volatile raw material costs and variability in fuel prices. Cyclical risk is mitigated somewhat by the increased diversification of the company's customer base and lowered cost structure, as well as ever-tightening global emissions regulations, which will drive growth in the market for emission control products independent of global economic conditions. Also mitigating risk and supporting liquidity is a lack of material debt maturities until 2017. As noted, volatile fuel prices also present a risk, since TEN's equipment on smaller and more fuel efficient vehicles tends to be less profitable. As with other auto suppliers, raw material price volatility is a risk, although the company passes along a substantial portion of the change in its material costs to its original equipment customers. However, offsetting increased material costs in the aftermarket business can be more challenging.
In the 12 months ended Sept. 30, 2014, TEN's credit profile strengthened on continued improvement in the company's operating performance and a modest reduction in debt. As of Sept. 30, 2014, TEN's EBITDA leverage (as calculated by Fitch) was 1.7x, down from 2.2x at Sept. 30, 2013, while total debt declined to $1.3 billion from $1.4 billion. FFO adjusted leverage declined to 3.2x from 3.4x. Fitch notes, however, that debt tends to rise and fall as seasonality in the company's free cash flow leads to increased borrowings at certain times of the year.
Free cash flow grew in the 12 months ended Sept. 30, 2014 to $173 million from $98 million a year earlier due to higher earnings and a positive change in working capital, partially offset by higher capital spending. Over the intermediate term, Fitch expects free cash flow to remain positive, but it will likely be down from recent historical levels due to a combination of increased cash taxes, higher restructuring costs and increased capital spending to support growing business levels. TEN has fully utilized most of its net operating loss (NOL) tax credits in the U.S., which will result in higher cash taxes, while restructuring actions will have the greatest impact on cash in 2014 and 2015.
TEN's secured revolver and secured Term Loan A are both rated 'BBB-', one-notch above the company's IDR, reflecting their substantial collateral coverage, which includes virtually all of the company's U.S. assets and up to 66% of its first-tier foreign subsidiaries. The company's senior unsecured notes, including the proposed notes, are rated 'BB', one notch below the company's IDR, to reflect the substantial amount of secured debt in the company's capital structure. Assuming a fully-drawn revolver, about 54% of TEN's debt would be secured, reducing potential recoveries for unsecured creditors.
Positive: Further developments that may, individually or collectively, lead to a positive rating action include:
--EBITDA leverage declining below 2.0x on a consistent basis throughout a full year;
--Maintaining a value-added EBITDA margin of 10% or higher;
Increasing the value-added free cash flow margin to about 5% on a consistent basis.
Negative: Further developments that may, individually or collectively, lead to a negative rating action include:
--A severe decline in global vehicle production that leads to reduced demand for TEN's products;
An increase in EBITDA leverage to above 2.5x for a prolonged period;
--A decline in the company's value-added EBITDA margin below 8%;
--A prolonged period of negative free cash flow that erodes the company's liquidity.
Fitch currently rates Tenneco Inc. as follows:
Secured Term Loan A 'BBB-';
Secured revolving credit facility 'BBB-';
Senior unsecured notes 'BB'.
The Rating Outlook is Stable.
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