Sept 4 - Fitch Ratings has affirmed the 'B+' Issuer Default Ratings (IDRs)
of American Axle & Manufacturing Holdings, Inc. (AXL) and its American
Axle & Manufacturing, Inc. (AAM) subsidiary. Included in its rating actions,
Fitch has assigned a rating of 'B-/RR6' to AAM's proposed issuance of $550
million in senior unsecured notes due 2022. Fitch also has affirmed the
ratings on AAM's secured revolving credit facility and 9.25% senior secured
notes at 'BB+/RR1', while it has affirmed AAM's senior unsecured rating at
'B-/RR6'. A full list of the rating actions taken on AAM and AXL is included at
the end of this release. AAM's ratings apply to a $438 million secured revolving
credit facility, $383 million of senior secured notes and $1.3 billion of senior
unsecured notes. The Rating Outlook for both AXL and AAM is Positive.
The proposed new notes rank pari passu with AAM's existing senior unsecured
notes. Like the existing $200 million senior unsecured notes due 2019, the new
notes will be guaranteed by AAM's domestic subsidiaries that also guarantee its
secured revolving credit facility and its 9.25% senior secured notes due 2017.
AAM intends to use the proceeds from the new notes to redeem its $250 million in
senior unsecured notes due 2014 and to make an optional $42.5 million prepayment
on the senior secured notes due 2017. In addition, the company plans to use a
portion of the proceeds to make contributions to its defined benefit pension
plans, with remaining proceeds used for premium payments on the note redemption
and for general corporate purposes.
AXL also announced today that it upsized its secured revolving credit facility
on Aug. 31, 2012, to $438 million from $322 million. The upsizing includes a
reduction in commitments maturing in June 2013 to $73 million from $87 million.
The increase will provide the company with additional liquidity, while also
offsetting the decline in liquidity that otherwise would occur with the maturity
of the 2013 commitments. With the amendment, the company now has $365 million of
revolver commitments that do not mature until June 2016, up from only $235
million in 2016 commitments prior to the amendment.
The $258 million net increase in debt associated with the contemplated
transactions (including the notes issuance, the 5.25% note redemption and the
optional 9.25% note prepayment) will result in an increase in total leverage.
However, the level of secured debt in the company's capital structure will
decline when it makes the optional $42.5 million prepayment on the 9.25% secured
notes. In addition, redeeming the 2014 notes now removes the uncertainty of
funding the maturity in a year-and-a-half and locks in the coupon rate in the
current favorable pricing environment. Fitch estimates that leverage at year-end
2012 will be near 4.0x, about 0.7x higher than it would have been had all of the
contemplated transactions not taken place. Based on the company's maturity
schedule following the transactions, opportunities for significant debt
reduction will be limited over the intermediate term.
The funded status of the company's pensions could improve substantially as a
result of the planned contributions. In particular, Fitch expects the
contribution to cover any additional pension funding related to the closure of
the Detroit Manufacturing Complex (DMC), which the Pension Benefit Guaranty
Corporation (PBGC) has estimated at $124 million. Fitch notes that the expected
planned contributions are a 'pull-forward' of funding that otherwise would have
been required in future years and do not represent a change in the plans'
projected benefit obligation. Although Fitch expects the voluntary pension
contributions could drive free cash flow negative in 2012, free cash flow is
expected to be higher in each of the next several years than it otherwise would
have been, as the voluntary contribution is expected to substantially reduce the
level of required contributions going forward. As of year-end 2011, AXL's
pensions were only 62% funded, with an underfunded position of $275 million.
The ratings for AXL and AAM reflect the improvement seen in 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 has been among the strongest in
the auto supplier industry. In addition, AXL's business has fundamentally
strengthened as the company has experienced success in diversifying its revenue
base away from a heavy reliance on light trucks. Its $1.2 billion 2012 through
2014 backlog of new business wins 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.
Despite its increased revenue diversification, AXL's ratings will be weighed
upon in the near term by its continued heavy exposure to GM's light truck
platform, although the significant progress AXL has made in reducing its cost
base places it in a better position today to withstand a downturn in light truck
demand. Also weighing on the ratings is Fitch's expectation that free cash flow
in 2012, excluding the voluntary pension contribution, will be limited by the
company's need to continue making investments to support the significant growth
in its business over the intermediate term. Longer-term, however, Fitch expects
free cash flow to strengthen meaningfully as the new vehicle programs transition
into regular production.
The Positive Outlook reflects Fitch's expectation that AXL's credit profile will
strengthen over the intermediate term, as business levels grow and revenue
becomes more diversified. Free cash flow and cash liquidity are also expected to
rise on increased production levels. Fitch expects higher earnings to result in
declining leverage, which could fall to near 3.0x by year-end 2013. The higher
funded status of the company's pension plans and a more favorable
intermediate-term debt maturity profile also support the Positive Outlook.
As with all auto suppliers, the greatest risk to AXL's credit profile is the
potential for another slowing of the global economy. However, this is tempered
somewhat by the increasing diversification of the company's customer base and
its lower cost structure, both of which have positioned the company to better
withstand another downturn in the auto market. Furthermore, AXL's direct
exposure to a near-term European recession is very limited, with only about 3%
of its revenue generated in the region. A lack of meaningful debt maturities
until 2017 further helps to mitigate liquidity risk over the next two years.
Another ongoing risk is the potential for a rise in U.S. fuel prices to drive a
decline in light truck demand, given the still-substantial portion of the
company's revenue that is derived from light truck production. Fitch expects
light truck demand to hold up better in a rising fuel cost environment today,
however, than during the last spike in fuel prices, as a result of improved
truck fuel efficiency and ongoing demand from core truck customers. In addition
to fuel price sensitivity, margins and free cash flow could also be pressured by
increasing raw materials prices, although the decline in AXL's fixed cost base
and a continued focus on passing these costs through to customers would help to
dampen the effect.
The Recovery Ratings (RRs) of 'RR1' on AAM's secured revolving credit facility
and its senior secured notes is based on their strong collateral coverage,
including virtually all of the assets of AXL and AAM, and their superior
recovery prospects in a distressed scenario. The rating of 'RR6' on AAM's senior
unsecured notes reflects the significant amount of secured debt in the company's
capital structure (assuming a fully drawn revolving credit facility), which
drives their estimated recovery prospects into the 0% to 10% range in a
WHAT COULD TRIGGER A RATING ACTION
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 does not
currently anticipate developments with a material likelihood, individually or
collectively, leading to a rating downgrade.
Fitch has affirmed the following ratings, with a Positive Outlook:
IDR at 'B+'.
IDR at 'B+';
Secured credit facility rating at 'BB+/RR1';
Senior secured notes rating at 'BB+/RR1';
Senior unsecured rating at 'B-/RR6'.