TEXT - Fitch rates American Axle & Manufacturing Inc proposed notes
Feb 14 - Fitch Ratings has assigned a rating of 'B-/RR6' to American Axle & Manufacturing, Inc.'s (AAM) proposed issuance of $400 million in senior unsecured notes due 2021. AAM is the principal operating subsidiary of American Axle & Manufacturing Holdings, Inc. (AXL). Fitch's Issuer Default Rating (IDRs) for both AXL and AAM is 'B+' and the Rating Outlook for both is Positive. The proposed new notes will be guaranteed by AXL and each of its subsidiaries that also guarantee AAM's 6.625% senior unsecured notes and certain future subsidiaries of the company. If the notes are rated investment grade by certain rating agencies, AAM may request to have the guarantees released. AAM intends to use the proceeds from the new notes to redeem its $300 million in 7.875% senior unsecured notes due 2017 and for general corporate purposes. Concurrent with the offering of the proposed notes, AAM has made a tender offer for all of the 7.875% notes outstanding. Although the proposed notes will result in a net increase in debt following the 7.875% note redemption, the transaction will reduce the principal amount of bond debt maturing in 2017 to $340 million from a relatively heavy $640 million, as only the remaining 2017 note maturity will be the company's 9.25% senior secured notes. Fitch notes that AAM has an opportunity to prepay an additional $42.5 million in principal on the 9.25% notes later this year. KEY RATING DRIVERS The ratings for AXL and AAM continue reflect the strengthening of the drivetrain and driveline supplier's credit profile over the past several years as conditions in the global light vehicle market have improved. In particular, the company has benefited from relatively strong pickup and sport-utility vehicle (SUV) production at its two largest customers, General Motors Company (GM) and Chrysler Group LLC, and its margin performance continues to be among the strongest in the auto supplier industry, despite some recent weakening tied to the start of new product programs. Fundamentally, AXL's book of business continues to strengthen as the companies diversifies its revenue base away from a heavy reliance on U.S. light truck production. Its $1.25 billion backlog of new business for the 2013 through 2015 timeframe is heavily weighted toward passenger cars and crossover vehicles. AXL also continues to increase the geographical diversity of its revenue base, with new business wins from an increasing number of non-U.S. manufacturers. Notably, however, the company's exposure to the weak European market remains small, at only about 3% of 2012 revenue. Despite its increased revenue diversification, in the near term, AXL's ratings will continue to be weighed down by its continued heavy exposure to GM's light truck platform, although new versions of that truck projected to go on sale in the second quarter of this year could boost AXL's near-term sales. Also weighing on the ratings is Fitch's expectation that near-term free cash flow will be limited by the company's need to continue making investments to support the significant growth in its business expected over the longer term. There is also a heightened risk of increased costs tied to production inefficiencies as a large number of new product programs ramp up over the next several years. In the second half of 2012, AXL experienced several of these sorts of issues, which led to a decline in the company's margin performance that could persist into early 2013. Going forward, Fitch expects AXL's margins to be a little lower than their historical level, but still relatively strong, as the company's product portfolio becomes more diversified. The positive outlook on AXL and AAM reflects Fitch's expectation that the company's credit profile will strengthen over the intermediate term, as business levels grow and revenue becomes more diversified. Fitch expects free cash flow and cash liquidity to rise on higher vehicle production volumes and increased penetration, while higher earnings are also likely to contribute to declining leverage, which could fall below 3.5x by year-end 2013. Following $225 million in contributions to its pension plans in 2012, a portion of which was debt-financed, Fitch expects the company's pension funding requirements to be minimal over the next several years. Longer term, Fitch expects the company to continue taking a relatively conservative approach to financial management, with a focus on reducing leverage while maintaining a strong liquidity position. The Recovery Rating of 'RR6' on AAM's senior unsecured notes, including the proposed notes, reflects the significant amount of secured debt in the company's capital structure (assuming a fully drawn revolving credit facility) that is senior to the company's unsecured obligations. This drives Fitch's estimated recovery prospects for the company's unsecured notes into the 0% to 10% range in a distressed scenario. AXL's leverage (debt/Fitch-calculated EBITDA) increased during 2012 to 4.1x from 3.1x as the company debt-financed certain contributions to its pension plans above required minimums and as EBITDA was pressured by costs associated with new product programs. Overall, debt rose to $1.5 billion from $1.2 billion while Fitch-calculated EBITDA (adjusted for restructuring expenses) declined to $352 million from $383 million. Free cash flow for the year was negative $383 million, but this included $115 million of special pension contributions related to plant closures and an estimated $75 million of voluntary pension contributions. The negative free cash flow also included $89 million of other non-recurring cash items, such as restructuring costs, debt refinancing costs and a change in payment terms to GM. Fitch expects free cash flow to improve significantly in 2013, although it will remain pressured by elevated capital expenditures and other costs tied to new product programs. Despite the negative free cash flow in 2012, AXL's liquidity position at year-end was adequate, with $62 million in cash and $415 million in availability on the company's secured revolver. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Continued diversification of the company's revenue base; --Positive free cash flow generation; --A decline in leverage; --Ongoing margin performance near top of the auto supplier industry. Negative: The current Rating Outlook is Positive. As a result, Fitch's sensitivities do not currently anticipate developments with a material likelihood, individually or collectively, leading to a rating downgrade.