TEXT-S&P cuts TMD Friction to 'BB-'

Tue Dec 18, 2012 11:31am EST

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Overview
     -- The credit quality of Luxembourg-based automotive supplier TMD 
Friction's parent, Nisshinbo Holdings, has slightly declined in our
view.
     -- As a result, we are lowering our rating on TMD Friction to 'BB-' from 
'BB' because we continue to believe that TMD's credit quality is influenced by 
its owner Nisshinbo.
     -- We nevertheless are keeping our assessment of TMD's stand-alone credit 
profile at 'b', despite the recent deterioration of performance and credit 
metrics, because we view TMD's "adequate" liquidity as a key support.
     -- The stable outlook reflects our expectation that TMD will continue to 
benefit from Nisshinbo's ownership.
 
Rating Action
On Dec 18, 2012, Standard & Poor's Ratings Services lowered its long-term 
corporate credit rating on Luxembourg-based automotive supplier TMD Friction 
Group S.A. (TMD) to 'BB-' from 'BB'.

We also lowered our issue rating on TMD's EUR97 million senior secured notes 
outstanding to 'BB-' from 'BB'. The'3' recovery rating on the notes is 
unchanged, reflecting our expectation of meaningful (50%-70%) recovery 
prospects in the event of a payment default.

Rationale
The downgrade primarily relates to our view that credit quality at Nisshinbo 
Holdings Inc., TMD's parent, has slightly declined. The corporate credit 
rating on TMD continues to reflect full ownership by Nisshinbo, in line with 
our parent-subsidiary criteria. 

Although we do not rate Nisshinbo, based on public information we view its 
credit profile in the 'bb' category, that is, stronger than TMD's stand-alone 
credit profile (SACP), which we continue to assess at 'b'. We view TMD as a 
strategically important entity for Nisshinbo.

Since the beginning of 2012, TMD has redeemed EUR63 million of its EUR160
million 
senior secured notes. These transactions were funded through a subordinated, 
noncash-paying shareholder loan from Nisshinbo. We view this as a tangible 
evidence of support from Nisshinbo, which now provides a meaningful portion of 
TMD's debt--more than one-third of nonadjusted debt. In addition, these 
transactions will support TMD's future cash generation by alleviating cash 
interests by almost EUR7 million a year.

Nisshinbo is a Japanese conglomerate with activities in automobile brakes 
(TMD), textiles, paper products, mechatronics, chemicals, electronics, and 
real estate, primarily in Japan and the rest of Asia. On March 31, 2012, 
Nisshinbo reported annual revenues of JPY379 billion (equivalent to EUR3.4
billion 
as of Dec. 18, 2012). Nisshinbo is listed on the Tokyo stock exchange.

We anticipate a weaker 2012 operating performance for TMD than we had 
previously expected under our base case. Our revised base-case scenario for 
2013 assumes a further erosion of our adjusted EBITDA margin for TMD from the 
depressed 2012 level to slightly below 5%. We continue to see weak economic 
conditions in Europe, where TMD generates the bulk of its revenues. 

Under our revised base-case forecasts, we expect TMD to generate a ratio of 
funds from operations (FFO) to Standard & Poor's adjusted debt, which includes 
subordinated shareholder loans from Nisshinbo, barely above 5% in 2012 and 
2013, which is below the 10% that we would consider commensurate with a 'b' 
SACP. We also anticipate Standard & Poor's adjusted debt to EBITDA will be 
above 6x in 2013. 

Despite these depressed credit metrics, we continue to assess TMD's SACP at 
'b', primarily because of the company's "adequate" liquidity position. Another 
support to the SACP is that we expect TMD to contain negative free operating 
cash flow (FOCF) to limited amounts in 2012 and 2013, in part because TMD's 
supply chain improved, resulting in lower working-capital requirements, 
especially regarding inventory. 

Another supporting development is that TMD has reduced its vulnerability to 
raw material prices fluctuations, thanks to some financial hedges and new 
price indexation agreements with some original equipment manufacturers.

However, we believe the company has consumed any headroom under the current 
'b' SACP level. We could revise the SACP downward if TMD's stand-alone 
performance in 2013 fell below our expectations, and generated an adjusted 
EBITDA margin materially below 5%. Largely negative FOCF resulting in a 
reduced liquidity cushion would also put pressure on the SACP.

Liquidity
We consider TMD's liquidity position to be "adequate", as our criteria define 
this term.

TMD's secured notes are bullet bonds that mature in 2017. The company also 
benefits from intercompany loans from Nisshinbo that will mature in 2018. 
Otherwise, the company has no significant debt maturities until 2017. 

TMD reported EUR33 million in cash and cash equivalents on Sept. 30, 2012. 
However, we treat the entire cash balance as necessary to maintain ongoing 
operations. Other cash sources include a EUR19 million unused committed 
revolving credit facility (RCF) and a borrowing base facility for a maximum 
amount of EUR25 million, which TMD currently used for guarantees only.

We anticipate limited negative FOCF in the coming 12 months, no dividend 
distribution, and only very small acquisitions. However, if operating 
performance declines more than we expect and leads to largely negative FOCF, 
it could put liquidity under stress.

Relevant aspects of the group's liquidity profile, based on our criteria, are 
as follows:
     -- We expect TMD's sources of liquidity over the next 12-24 months to 
significantly exceed uses.
     -- We expect that net sources would still be marginally positive if 2012 
EBITDA fell 15% short of our forecast.
     -- TMD's secured notes are not subject to maintenance financial 
covenants, but only to incurrence financial covenants. The RCF includes 
maintenance covenants, and we expect TMD to maintain adequate headroom in our 
base case. However, any meaningful deterioration in operating performance from 
current expectations would result in tight covenant headroom.
     -- Our assessment of TMD's liquidity position incorporates potential 
shareholder support in the form of cash injections in case of liquidity need.
 
Recovery analysis
The issue rating on the EUR160 million senior secured notes (EUR97 million 
outstanding) issued by TMD's subsidiary, TMD Friction Finance S.A., is 'BB-', 
in line with the corporate credit rating on TMD. The recovery rating on the 
senior secured notes is '3,' indicating our expectation of meaningful 
(50%-70%) recovery prospects in the event of a payment default.

The recovery rating on the senior secured notes is supported by a 
comprehensive security package comprising a first-lien security on TMD's 
assets (excluding accounts receivable in Germany and France) and shares shared 
with the RCF and the senior secured notes on a pari-passu basis in right and 
in priority of payment among them (as established in the intercreditor 
agreement), and a favorable insolvency regime, Luxembourg. At the same time, 
the recovery rating is constrained by some priority debt consisting of debt at 
the subsidiary level and part of the borrowing base facility, both of which 
would rank ahead of the senior secured notes in relation to some assets.

The notes' documentation contains incurrence covenants restricting TMD's 
ability to incur additional debt subject to a fixed-charge coverage ratio of 
2.25x and a senior secured leverage ratio of 3.0x, with carve-outs including 
an unspecified amount under receivables financing and EUR15 million under 
general debt basket. The documentation stipulates that additional debt must 
not exceed whichever is greater: EUR40 million or 65% of the amount of total 
accounts receivables minus EUR20 million. 

To calculate recoveries, Standard & Poor's simulates a hypothetical default 
scenario. We believe default would be triggered by declining operating 
performance due to prolonged weakness in demand for autos, combined with raw 
material price volatility. We assume that the RCF and borrowing-base facility 
maturing in 2014 would be refinanced on similar terms and a payment default 
would take place in 2015. We estimate TMD's stressed EBITDA would be about EUR30
million by the time of the hypothetical default.

Our going-concern valuation envisages a stressed enterprise value of around 
EUR135 million, using a 4.5x stressed EBITDA multiple. After deducting priority 
liabilities of about EUR50 million, primarily comprising the costs associated 
with enforcement, debt at local subsidiaries, 50% of the outstanding pension 
deficit, finance leases, and part of the borrowing base facility, we 
calculated residual value of about EUR75 million for secured lenders. We assume 
around EUR122 million of secured debt outstanding at default comprising 
outstanding senior secured notes of EUR97 million, a fully drawn RCF of EUR19 
million, and six months of prepetition interest, resulting in our expectation 
of meaningful (50%-70%) recovery in the event of a payment default, which 
according to our criteria results in a recovery rating of '3' for the senior 
secured noteholders.

Outlook
The stable outlook reflects our expectations for Nisshinbo's credit profile 
and the parent-subsidiary link. We expect that Nisshinbo will continue to 
integrate TMD operationally, therefore reinforcing the ties between the two 
companies and supporting the business profile. We also expect that Nisshinbo 
will assume any financial obligation related to the redemption or the 
refinancing of TMD's notes in the future. 

We anticipate no upside for the corporate credit rating on TMD over the next 
12 months. 

We could lower the corporate credit rating on TMD if support and benefits from 
Nisshinbo's ownership declined to an extent that they would no longer offer 
financial support to TMD if needed. 

Related Criteria And Research
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers' 
Speculative-Grade Debt, Aug. 10, 2009
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
May 27, 2009
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- Corporate Criteria--Parent/Subsidiary Links; General Principles; 
Subsidiaries/Joint Ventures/Nonrecourse Projects; Finance Subsidiaries; Rating 
Link To Parent, Oct. 28, 2004
 
Ratings List
Downgraded; Ratings Affirmed
                                        To                 From
TMD Friction Group S.A.
 Corporate Credit Rating                BB-/Stable/--      BB/Stable/--
 Analytical Factors
  Stand-Alone Credit Profile            b                  b 
 
TMD Friction Finance S.A.
 Senior Secured *                       BB-                BB
  Recovery Rating                       3                  3
 
*guaranteed by TMD Friction Group S.A.
 

 Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
column.
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