-- Plymouth, Mich.-based automotive supplier Metaldyne LLC proposes to
refinance existing debt following its announced acquisition by American
Securities LLC, through a recapitalization comprising a $545 million senior
secured term loan B and a $75 million revolver.
-- We believe Metaldyne's ratio of debt to EBITDA will remain at about
3.8x after this recapitalization because of sales recovery in its end markets
and the company's recent track record of sustained margins.
-- We are affirming our 'B+' corporate credit rating on Metaldyne and
assigning our 'B+' issue-level rating and '4' recovery rating to the proposed
term loan and revolver.
-- The stable outlook reflects our belief that Metaldyne can maintain
positive free operating cash flow in 2013, given the relatively favorable
trend for production in most of its end markets.
On Nov. 13, 2012, Standard & Poor's Ratings Services affirmed its 'B+'
corporate credit rating on Metaldyne LLC and maintained its stable outlook. At
the same time, we assigned a 'B+' issue-level rating and '4' recovery rating
to the proposed $545 million senior secured term loan B and $75 million
revolver. The '4' recovery rating indicates our expectation of average
(30%-50%) recovery. All ratings are subject to review of final documentation.
The ratings reflect what Standard & Poor's considers to be Metaldyne's "weak"
business risk profile and "aggressive" financial risk profile. Our business
risk assessment incorporates the multiple industry risks facing automotive
suppliers, including volatile demand, high fixed costs, intense competition,
and severe pricing pressures. These risks more than offset the favorable fact
that Metaldyne's products are used mostly in vehicle powertrains and therefore
have longer lives, are less commodity-like than many other automotive parts,
and support the company's double-digit EBITDA margins. The financial risk
assessment reflects our view that moderate free operating cash flow (FOCF)
and, in the long term, possible future additional distributions to
shareholders will likely limit significant debt reduction.
Our financial risk profile assessment is based on Metaldyne's plans for
refinancing existing debt following its announced acquisition by American
Securities LLC (not rated). We estimate debt to EBITDA will be at about 3.8x
at the end of 2012, including our adjustments to add to debt the net present
value of operating leases, underfunded postretirement obligations, and
accounts receivable sold. For the rating, we assume leverage to remain well
under 4.5x in future years.
We assume Metaldyne's financial policies will be aggressive, given the
concentrated ownership by the new sponsor and our expectation that the company
will generate some positive FOCF in 2012 and 2013. However, the level of cash
generation is highly sensitive to vehicle production, which we believe will
eventually turn volatile again. Our expectation for modest positive free cash
flow generation partly reflects our assumptions regarding margins and also our
assumption that capital spending would continue to exceed 30% of EBITDA.
The company is a private-equity-owned automotive supplier created from certain
assets during the bankruptcy restructuring of a predecessor company. In our
view, the most significant variable in Metaldyne's credit profile in the near
term remains the direction and pace of the auto industry recovery. Metaldyne's
cost cutting in recent years and its focus on fewer, but relatively more
attractive, product lines since bankruptcy have helped it benefit from the
ongoing recovery in North American vehicle demand.
Given its fair geographic diversity (North America and Europe were most of
2011 sales), we assume Metaldyne's revenue growth for the remainder of 2012
and 2013 will be determined by the pace of slowly rising auto production in
North America and the depth of the slowdown in Europe. Sales in North America
(roughly one-half of sales) are trending toward our expectation of 14.3
million unit sales in 2012. And while production improved about 20% during the
first 10 months of 2012 (mostly on Japanese restocking), we believe the
production growth rate will decline for the remainder of 2012 and 2013 but
remain in the mid- to high-single digits. Our economists currently forecast
U.S. GDP growing modestly in 2012 and 2013. We expect unemployment to remain
high, at about 8% for both years. In Europe (more than 35% of revenues), our
base-case outlook assumes light-vehicle production will decline by about 7% in
2012 and remain roughly flat in 2013.
Considering these economic assumptions and that customers' demands for price
reductions will offset some improvement in raw material pass-through, our
forecast for Metaldyne's operating performance over the next two years
-- Sales growth in the low- to mid-single digits in 2012 and 2013, with
several end markets growing slightly above our GDP growth rate estimates in
-- Adjusted EBITDA margin, by our assumptions, should remain about 100
basis points above 2011 levels, toward 15%, incorporating some benefits from
cost-reduction efforts and improvement in raw-material recovery, which pricing
pressure from customers and potential launch related costs will somewhat
-- Free cash flow to debt should remain between 5% and 8%, partly because
of somewhat higher year-over-year capital expenditure requirements over the
next two years to meet growth outside its North American and European end
We consider Metaldyne's customer diversity, based on end markets, to be
moderate: The Detroit-based automakers, along with Hyundai Motor Co.
(BBB+/Stable/--) and the ZF Group (not rated), were just below one-half of
2011 sales. The company is midsized--we estimate just more than $1 billion in
revenues in 2012--but we believe it is a leader in some product areas. Still,
we view its markets as fairly fragmented because some competitors are in-house
operations of larger companies or automakers, and others are smaller and more
vulnerable. Metaldyne's current business is much less exposed to unrecovered
increases in raw material costs than its predecessor, but not immune. This is
a critical change, in our view, from Metaldyne's previously more extensive
operations. The company does not have any significant pension or
postretirement health care obligations, and it has manageable union
representation. We believe the current owners purchased assets at prices that
should support profitable operations and manageable capital spending.
We believe competition in Metaldyne's main product lines is based on a
combination of technology and cost, rather than system integration or
synergies across the range of products. We also believe its current product
portfolio could consistently generate EBITDA margins in the low- to mid-teens,
somewhat higher compared with most similarly rated auto suppliers,
particularly given prospects for some ongoing recovery in industry demand and
the benefits of operating leverage.
Metaldyne's liquidity is adequate to cover its needs in the near term. The
company has minimal debt maturities until the maturity of its proposed term
loan in 2018. Our assessment of Metaldyne's liquidity profile incorporates the
following expectation and assumptions:
-- We expect sources of liquidity, including cash and bank facility
availability, to exceed uses of cash for well above 1.2x during the next 12 to
-- Our assessment reflects no significant expected shortfall in
liquidity, even if EBITDA declines 15%, despite its ongoing capital
expenditure requirements, given the lack of meaningful maturities into 2013.
-- We believe there will be sufficient covenant headroom for forecasted
EBITDA to decline by 15% without the company breaching proposed leverage
-- We believe Metaldyne is likely to absorb high-impact, low-probability
events, with limited need for refinancing, given its proposed transaction.
Our view reflects our expectation of positive FOCF generation for 2012 and
into 2013, coupled with meaningful liquidity through available cash and
availability under its proposed $75 million revolver at the close of the
transaction. Although we expect somewhat higher capital spending over the next
two years, we expect Metaldyne to maintain discipline in this area, limiting
such outflows to about $60 million to $70 million. Other uses of cash include
about $5 million debt amortization on its proposed term loan.
We assigned a 'B+' issue-level rating and '4' recovery rating to the proposed
$545 million senior secured term loan B and $75 million revolver. The '4'
recovery rating indicates our expectation of average (30%-50%) recovery. All
ratings are subject to review of final documentation.
The stable rating outlook reflects our belief that Metaldyne would generate
positive FOCF in the 12 months ahead with sustained EBITDA margins at above
2011 levels, given the somewhat favorable trend for vehicle production in
North America, though ongoing weakness in Europe somewhat offsets it. We
consider Ford's ability to maintain its market share to be a key factor in
Metaldyne's performance, and we believe some further share gains from other
key customers are possible.
We could lower the rating if FOCF generation turns negative for consecutive
quarters or if we believe that debt to EBITDA, including our adjustments,
would approach 5x or higher. Though we view this as unlikely, debt to EBITDA
could reach this threshold if, for example, Metaldyne's sales fall
meaningfully (more than 20%) year over year in 2013 with a more than
250-basis-points decline in EBITDA margins.
We consider an upgrade unlikely during the next year based on our current
assessment of Metaldyne's business and financial risks and its concentrated
ownership by financial sponsors, which we believe indicates that financial
policies will remain aggressive.
Related Criteria And Research
-- Economic Research: U.S. Economic Forecast: Long Time No See, Oct. 15,
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Corporate Criteria: Analytical Methodology, April 15, 2008
Corporate Credit Rating B+/Stable/--
Senior Secured B+
Recovery Rating 3
$75 mil revolver due 2017 B+
Recovery Rating 4
$545 mil term loan B ln due 2018 B+
Recovery Rating 4