TEXT-S&P affirms Visteon ratings on Halla acquisition

Overview
-- U.S.-based auto supplier Visteon Corp. has announced plans to
acquire the remaining 30% of Halla Climate Control Corp. and
terminate an agreement to sell the Visteon interiors business to a joint
venture.
-- We are affirming our ratings on Visteon; we view the company's
financial profile as still consistent with the 'B+' rating, although the
company now has less cushion for underperformance.
-- The recovery rating is unchanged by the reduction in the unrated
asset-based loan and the increase in the debt at Halla.
-- Our stable outlook on the rating reflects our belief that the company
will begin reducing debt when the transaction closes; it will use excess cash
flow to amortize significant amounts of the debt in two to three years.

Rating Action
On July 6, 2012, Standard & Poor's Ratings Services affirmed its ratings on
Van Buren Township, Mich.-based Visteon Corp., including its 'B+' corporate
credit rating. The outlook is stable.

Rationale
The pending Halla transaction will add an estimated $800 million of debt,
raising our estimate of debt-to-EBITDA to a peak of about 2.5x compared with
1.5x for the 12 months ended March 31, 2012. We assume Visteon will begin
reducing debt when the transaction closes; it will use excess cash flow to
amortize significant amounts of the debt in two to three years.

Visteon's interiors business remains a candidate for some form of divestiture.
The company noted the well-publicized prospective weakness in European
automotive production as one reason for terminating the proposed interiors
sale, but we expect the company will continue to work toward a transaction or
series of transactions to divest this noncore segment.

We view the company's financial profile as still consistent with the 'B+'
rating, although the company now has less cushion for underperformance. We
previously stated that we could lower the rating if the cumulative effect of
various potential strategic shifts appeared likely to hinder prospects for
positive cash flow or leverage that would consistently exceed 2.5x. Our stable
outlook on the rating reflects our belief that the company can generate
positive discretionary cash flow in 2012, achieve EBITDA margins in the high
single digits, and retain about $600 million in cash.

The ratings on Visteon reflect our expectation that the company will continue
its recent operating performance, including maintaining EBITDA margins in the
upper single-digit area. We also assume Visteon's debt-to-EBITDA will decline
back towards 2x from a peak of 2.5x following the Halla transaction.

Visteon's business risk profile is "weak" according to our criteria, marked by
some geographic, customer, and product diversity; at least upper-single-digit
EBITDA margins; and exposure to future automaker production. Although we
understand Visteon's backlog for supplying various vehicle programs should
account for more than 90% of its business for the next few years, actual sales
will depend on production levels. The company's success in further reducing
its overhead costs will also affect profitability.

We view Visteon's financial risk profile as "aggressive," in large part
because we assume the company's discretionary cash flow will be positive but
nominal in 2012, taking account of the Halla transaction. Also, in the long
term, we believe acquisitions or (perhaps less likely) possible future
distributions to shareholders could absorb free cash flow and constrain
significant debt reduction.

Our financial risk profile assessment also reflects Visteon's capital
structure, comprising:
-- $500 million of senior notes due April 2019;
-- An unused, unrated $220 million asset-based loan (ABL) revolving
credit facility expiring November 2015 (reducing to $175 million in
conjunction with the Halla transaction);
-- About $94 million in other debt as of March 31, 2012;
-- About $800 million of debt being borrowed at Halla to support the
tender offer; and
-- Unfunded postretirement obligations.

We assume the ratio of total debt to EBITDA will remain about 2x or less over
time and decline from a peak of about 2.5x after the Halla transaction. We
view leverage of about 2x as appropriate for the current rating because of the
proven potential for volatility in earnings and cash flow. Also, in our view
Visteon has a limited track record of results and strategy since emerging from
bankruptcy in October 2010, and faces execution risk for pending strategic
initiatives. We expect the company to generate positive discretionary cash
flow in 2012 through improved operating income and success in managing working
capital. The company's guidance prior to the impact of the Halla transaction
is for a maximum $30 million of free cash flow. We assume Visteon could pursue
small acquisitions.

Visteon is a large Tier I supplier serving the global automaker market through
four main product segments: climate control, interiors, electronics, and
lighting. For 2012 the company's revenue will likely be lower than the $7.5
billion it reported in 2011; the company's 2012 revenue guidance is $6.6
billion to $7 billion. The decrease reflects asset sales but excludes the
impact of a possible sale of its interiors business (23% of consolidated
revenues in the first quarter).

Visteon no longer plans to sell its existing interiors business to large
Chinese supplier Yanfeng Visteon Automotive Trim Systems Co. Ltd. (YFV);
Visteon currently owns 50% of YFV (three-month revenue was about $793
million), and YFV is Visteon's largest joint venture. But we assume Visteon
will continue to seek a disposition of the interiors business. We currently
assume a transfer of the lower-margin interiors business would not push
leverage over 2.5x (which could result in a lower rating), but we would
revisit this assumption if a transaction occurs.

We assume demand in the large North American market will continue to recover,
despite a weak economic outlook. We assume U.S. light-vehicle sales will be
14.0 million in 2012, up 10% over 2011. In 2012 we expect European market
demand to again be down year-over-year (for the fifth consecutive year)
because of the political and economic uncertainty surrounding the eurozone. We
assume the Asian markets, particularly China, will remain solid, but
production and sales in China in the near term are likely to be in the
mid-single digits, which is much slower growth than in recent years.

Visteon's competitive strengths include a global presence, customer diversity,
and a wide array of products. The company reports (first quarter 2012) that
its largest customers are Hyundai Motor Co. and its affiliates (26%), Ford
Motor Co. (18%), and Volkswagen AG (12%) based on consolidated and
nonconsolidated revenues. Approximately 64% of sales are in Asia-Pacific; 23%
in Europe; 10% in North America; and 3% in South America (consolidated and
nonconsolidated revenues). We believe competition in Visteon's main product
lines is based on price, quality, and technology.

Liquidity
We consider Visteon's liquidity to be "adequate" under our criteria, based on
the following:
-- We expect sources of liquidity to exceed uses by more than 1.2x for
the next two years.
-- As of March 31, 2012, sources of liquidity included $220 million
available under its ABL revolving credit facility expiring November 2015. The
facility requires minimum excess availability that is well below current
levels. The facility will be reduced to $175 million in conjunction with the
Halla transaction.
-- We believe the company has adequate headroom under its bank facility
covenant to maintain compliance in the event of a shortfall from projections.
-- Near-term debt maturities should be manageable, in our view,
consisting of about $1 million in amortization of long-term debt and $92
million of affiliate short-term debt related to non-U.S. operations, as of
March 31, 2012 (remaining availability on affiliate working capital credit
facilities was $180 million on March 31).
-- Cash balances were $721 million as of March 31, 2012 (including
restricted cash); $162 million was in the U.S.
-- We expect Visteon to generate some free cash flow in 2012, after
working capital investment, estimated capital spending of about $240 million,
and asset sales.

Visteon has various contingent obligations that could require it to use cash
over time, including one related to U.K. pension obligations. Our current
liquidity analysis does not reflect any assumption that the U.K. pension
contingency would reduce cash balances by a material amount. Separately, we
believe that, over time, Visteon may pursue acquisitions to bolster current
business segments.

Recovery analysis
We rate Visteon's $500 million, 6.75% senior notes 'B+'. The recovery rating
is '4', indicating our expectation of average (30% to 50%) recovery of
principal in the event of a default. (For the complete recovery analysis,
please see Standard & Poor's recovery report on Visteon to be published
following this report on RatingsDirect.)

Outlook
Our stable outlook reflects our belief that the company can generate positive
discretionary cash flow over time, achieve EBITDA margins in the high single
digits, and retain about $600 million in cash. We estimate that revenues will
likely decline because of asset sales, and that EBITDA margins will be about
9%. We assume leverage will peak about 2.5x after the Halla transaction and
that Visteon will begin reducing debt when the transaction closes. We believe
the company and the board continues to consider alternatives to dispose of the
interiors business. Still, so far at least, we do not believe these actions
point to an intention to increase financial leverage. We would review this
assumption if specific actions indicated otherwise.

We could lower the rating if it appears that the company would have
significant negative discretionary cash flow, or if we believed that
debt-to-EBITDA would exceed and remain more than 2.5x, rather than stay at
about 2x or less. For example, we estimate that adjusted debt-to-EBITDA could
reach 2.5x if Visteon's gross margins fall by about 300 basis points on a
modest revenue decline beyond the $6.6 billion level of revenues that Visteon
cites as the low end for 2012. We view leverage greater than 2.5x as
inappropriate for the current rating because of the potential for earnings and
cash flow volatility, and the company's limited track record of results and
strategy since emerging from bankruptcy.

We could also lower the rating if the cumulative effect of various potential
strategic shifts appeared likely to lead to a deterioration in prospects for
positive cash flow or leverage that would consistently exceed 2.5x (e.g.,
failure to reduce Halla-related debt; the possible sale of the company's
interior business; or--although less likely in our view--a decision to incur
debt for a recapitalization).

Any future upgrade would likely be based on whether we believed Visteon could
sustain its margins and build a track record of free cash generation beyond
the modest level we assume for 2012. We would also consider the impact of
Visteon's various potential strategic or financial transactions on its
business and financial risk profiles. The limited track record since emerging
from Chapter 11 could also be a factor.

Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings affirmed; Recovery rating unchanged

Visteon Corp.
Corporate credit rating B+/Stable/--
Senior unsecured
6.75% notes due 2019 B+
Recovery rating 4

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