TEXT-Fitch rates TRW's proposed notes 'BBB-'
Feb 25 - Fitch Ratings has assigned a rating of 'BBB-' to TRW Automotive, Inc.'s (TAI) proposed $400 million in senior unsecured notes due 2021. TAI is a subsidiary of TRW Automotive Holdings Corp. (TRW). The Issuer Default Rating (IDR) for both TRW and TAI is 'BBB-' and the Rating Outlook is Stable. The proposed notes will be issued through a 144A offering and will be guaranteed by substantially all of TAI's existing and future direct and indirect wholly owned domestic subsidiaries. Although the company has not been explicit in how it expects to use the funds, other than for general corporate purposes, Fitch notes the company has several potential calls on cash over the next 18 months. These include a $533 million note maturity in the first quarter of 2014 and the option to call its $219 million in 8.875% bonds in December 2013. Extra liquidity from the notes could also provide a cash cushion in case the company incurs any significant cash payments related to its antitrust case in Europe. KEY RATING DRIVERS The ratings of TRW and TAI reflect the auto supplier's relatively strong credit profile, which is characterized by low leverage, high margins and consistently positive free cash flow. TRW continued posted positive free cash flow in 2012 despite weak light vehicle production levels in several of the company's key markets, particularly Western Europe. Although its EBITDA margin (as calculated by Fitch) of 9.8% was down from 10.6% in 2011, it remained relatively strong for the industry and was weighed upon by costs associated with building 11 new plants, including nine in China, that will come on line over the next 24 months. Looking ahead, Fitch expects the company to continue producing positive free cash flow over the intermediate term, despite increased capital spending, which will provide the company with meaningful financial flexibility. While there are meaningful risks to TRW's credit profile, Fitch believes the company has the financial strength to withstand several negative developments while retaining an investment grade profile. Concerns include the cyclical nature of the auto industry, volatility in raw material costs, and TRW's significant exposure to the European auto market. These concerns are mitigated somewhat by the company's diverse global customer base and increasing penetration rates on a number of vehicle platforms, which has helped to support sales in weakened markets. TRW's relatively heavy exposure to Europe, where nearly 43% of its 2012 revenue was generated, is of particular concern, although Fitch notes that Volkswagen AG, financially the strongest of Europe's volume manufacturers, is TRW's largest customer, and TRW has continued to perform well despite the sharp decline in production in the region. TRW produced positive free cash flow through the last downturn, and the company is better positioned today to withstand another demand shock in the intermediate term, with a lower cost structure and stronger balance sheet. Another meaningful risk is the potential for an adverse outcome resulting from an ongoing antitrust investigation in Europe. The U.S. Department of Justice (DOJ) concluded its own investigation last year, and TRW paid a $5.1 million fine. Investigations like this one can take years to resolve, so there may not be a near-term resolution to the issue. However, the relatively low fine paid following the DOJ investigation could bode well for the outcome of the European case. Fitch will evaluate the effect of the investigation on TRW's credit profile when more information becomes available, however the company's substantial liquidity and positive free cash flow will help mitigate the effect of any required cash outlays on its credit profile. In the fourth quarter of 2012, TRW initiated a $1 billion share repurchase program that runs through Dec. 14, 2014. As of Dec. 31, 2012, the company had repurchased $268 million in shares, and the company has stated that it expects to purchase another $500 million in shares in 2013. Although the size of the program is significant, Fitch expects the company to fund it using free cash flow and cash on hand. Fitch also expects that management will be judicious in its repurchase activity, slowing or stopping the program if free cash flow is weaker than expected, so the program is not likely to have a detrimental effect on the company's overall credit profile. TRW's credit profile is strong for the auto supply industry. Leverage (debt/Fitch-calculated EBITDA) at year end 2012 was 0.9x, with $1.5 billion in debt and full-year EBITDA (as calculated by Fitch) of $1.6 billion. Total liquidity at year end 2012 included $1.2 billion in cash and cash equivalents and $1.4 billion in revolver availability. Free cash flow for the year was $333 million, down from $549 million in 2011, on weaker operating conditions in Europe and as the company continued to invest in the aforementioned new manufacturing facilities. Fitch expects free cash flow to remain solidly positive over the intermediate term as operating cash flow more than offsets capital spending, which will likely remain elevated through 2013 on the facilities investments. RATING SENSITIVITIES The Stable Rating Outlook on TRW and TAI indicates that a near-term change in the ratings is not likely. Longer term, Fitch could consider a positive rating action if leverage remains low and free cash flow, margins and liquidity remain strong for an extended period. On the other hand, Fitch could consider a negative rating action if global auto production declines sharply or if the company undertakes a large, debt-financed acquisition. A significant increase in long-term debt to support shareholder-friendly actions would also be viewed negatively by Fitch, although share repurchases or dividends funded through operating cash flow could be consistent with the ratings, provided the company maintains sufficient liquidity to fund its operations through the cycle. Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors. Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012); -'-Evaluating Corporate Governance' (Dec. 12, 2012); --'2013 Outlook: U.S. Auto Manufacturers and Suppliers' (Dec. 17, 2012). Applicable Criteria and Related Research 2013 Outlook: U.S. Auto Manufacturers and Suppliers Corporate Rating Methodology Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers Evaluating Corporate Governance
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