TEXT-S&P upgrades Sensata Technologies to 'BB', outlook stable
Overview -- The Netherlands-based manufacturer Sensata Technologies Holding N.V.'s largest shareholder, Bain Investment Co. S.C.A., sold shares that reduced its ownership in Sensata to about 45% from about 50%. -- We believe Bain's continued exit reduces risks related to Sensata pursuing a more aggressive financial policy. -- We are raising our ratings on Sensata, including our corporate credit rating to 'BB' from 'BB-'. -- The stable outlook reflects our expectation that the company will maintain good credit measures but that a higher rating is unlikely without further significant reduction in Bain's stake in Sensata. Rating Action On Dec. 20, 2012, Standard & Poor's Ratings Services raised its ratings, including the corporate credit rating to 'BB' from 'BB-', on Sensata Technologies B.V. The outlook is stable. We are also removing the ratings from CreditWatch, where we placed them with positive implications on Dec. 12, 2012. Rationale The upgrade follows the completion of a secondary share offering that reduces Bain Capital's ownership of publicly traded Sensata Technologies Holding N.V. (the ultimate parent of rated Sensata Technologies B.V.) to less than 50%. We believe the offering provides further evidence of the lessening influence of Bain on the company's financial policy and supports a one-notch upgrade. The ratings on electronic sensors and controls manufacturer Sensata reflect the company's "aggressive" financial risk profile and "satisfactory" business risk profile. Standard & Poor's believes credit measures will remain consistent with the rating, including funds from operations (FFO) to adjusted debt of about 20% and adjusted debt to EBITDA of about 3.5x. In 2013, we expect Sensata's adjusted EBITDA margin to remain very good at about 29% and revenue to increase, benefiting from: -- A continued slow global economic recovery, -- Global light-vehicle production growth despite potentially weak conditions in Europe, and -- The potential to supplement growth through some acquisition activity. Sensata, formerly a division of Texas Instruments Inc., consists of two business units that manufacture highly engineered electronic sensors and controls. Our assessment of the company's management and governance is "fair." We expect revenue to approach $2 billion in 2012. The company is significantly exposed to the volatility of the global automotive market, which accounts for more than half of sales. The European auto market is Sensata's largest single exposure, accounting for 25% of 2011 sales, and we believe the region presents heightened near-term economic risks. However, we expect Sensata to maintain its No. 1 market share in most of its products--it is the sole or primary source for most of its customers. Demand for its products is increasing at a faster rate than vehicle growth, as sensor content per vehicle rises. We do not believe growth prospects are as favorable in the controls portion of the business, but this segment does provide diversification benefits to the credit profile. The company's global manufacturing footprint helps it maintain its low-cost production and leading positions. Sensata has good geographic diversification: In 2011, about 65% sales were outside of the U.S. We expect its operating margin to remain solid. Liquidity Liquidity is "adequate" in our assessment. We take into account the following expectations and assumptions: -- Sensata's ratio of liquidity sources, including cash and facility availability, to uses is likely to exceed 1.2x for the next 12 months. -- We expect net sources to remain positive and for the company to have sufficient headroom even if EBITDA declined by 15%. -- We believe the company has sound relationships and satisfactory standing in credit markets. Near-term maturities are minimal. In May 2011, the company refinanced its debt. The company has ample availability under a $250 million revolver that expires in 2016 and a $1.1 billion term loan due in 2018. The company also has $700 million of senior unsecured notes due 2019. Headroom under a springing covenant, setting a maximum 5x senior secured net leverage ratio when the revolver is drawn by 10% or more, is likely to remain substantial. Recovery analysis The issue rating on the senior secured debt is 'BBB-' (two notches above the corporate credit rating), and the recovery rating is '1', indicating our expectation that lenders would receive very high (90%-100%) recovery in a payment default scenario. The issue rating on the unsecured debt is 'B+' (two notches below the corporate credit rating), and the recovery rating is '6', indicating our expectation that lenders would receive negligible (0-10%) recovery in a payment default scenario. Outlook The outlook is stable. We believe credit measures will remain appropriate for the rating at about 20% FFO to debt and 3.5x debt to EBITDA. A further upgrade is unlikely until Bain has significantly further reduced its investment in Sensata and would depend on our expectation that the company would maintain appropriate credit measures for a higher rating. A downgrade is possible if results deteriorated such that we expected FFO of about 15% or less and debt to EBITDA of 4x or more. This could occur, for instance, if revenue declines by more than 10% in 2013, operating margin declines more than 2%, and no debt reduction takes place. This scenario would likely require global recessionary conditions causing declines in global light vehicle production. Related Criteria And Research -- General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, April 4, 2006 Ratings List Upgraded; Removed From CreditWatch To From Sensata Technologies B.V. Corporate Credit Rating BB/Stable/-- BB-/Watch Pos/-- Senior Secured BBB- BB+/Watch Pos Recovery Rating 1 1 Senior Unsecured B+ B/Watch Pos Recovery Rating 6 6 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.