November 13, 2012 / 11:01 PM / 5 years ago

TEXT - S&P affirms Metaldyne LLC rating

Overview
     -- 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.

Rating Action
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.

Rationale
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 
incorporates:
     -- 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 
these years.
     -- 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 
offset.
     -- 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 
markets.

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. 

Liquidity
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 
18 months. 
     -- 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 
covenant tests. 
     -- 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.


Recovery analysis
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.

Outlook
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, 
2012 
     -- 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


Ratings List
Ratings Affirmed

Metaldyne LLC
 Corporate Credit Rating                B+/Stable/--       
 Senior Secured                         B+                 
   Recovery Rating                      3                  

New Rating

Metaldyne LLC
 Senior Secured
  $75 mil revolver due 2017             B+                 
   Recovery Rating                      4                  
  $545 mil term loan B ln due 2018      B+                 
   Recovery Rating                      4

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