-- U.S.-based auto supplier UC Holdings Inc. (UC) plans to issue a new
$237 million term loan and a $100 million asset based lending facility as a
result of the pending integration of Diversified Machine Inc. and Concord
International Inc. under the common private equity sponsor Platinum Equity
-- We are assigning our 'B' corporate credit rating to UC and our 'B'
issue rating to the company's proposed $237 million term loan with Diversified
Machine Inc. and Concord International Inc. as borrowers.
-- The stable outlook reflects our expectations that UC's leverage, pro
forma for the transaction, would be about 4x or less over the next 12 months,
with more than 15% EBITDA headroom under its proposed leverage covenant tests,
and that the company would not have positive free operating cash flow until
On Nov. 14, 2012, Standard & Poor's Ratings Services assigned its 'B'
corporate credit rating to UC Holdings Inc. At the same time, we also assigned
our 'B' issue rating and '4' recovery rating (indicating our expectation of
averagerecovery in the event of payment default) to UC's proposed
$237 million term loan. The borrowers will be Diversified Machine Inc. (DMI,
B-/Developing/--) and Concord International Inc. (SMW, unrated). This
transaction is a result of the pending integration of the two distinct legal
entities under the common private equity sponsor Platinum Equity Advisors LLC.
The existing debt at both companies will be refinanced.
All ratings are subject to a review of final documentation. At close of
transaction, we expect to withdraw all existing ratings on DMI.
The ratings on UC reflect our view of the company's "highly leveraged"
financial profile and "vulnerable" business profile. The stable outlook
reflects our expectations that UC's leverage, pro forma for the transaction,
would be about 4x or less over the next 12 months, with more than 15% EBITDA
headroom under its proposed leverage covenant tests. The financial risk
assessment also reflects our expectation for negative free operating cash flow
prospects over the next 12-18 months following the proposed integration, and
refinancing. Private equity firm Platinum Equity Advisors LLC owns UC (and
owned both DMI and SMW before this transaction), and we believe the financial
policy will remain aggressive. The business risk assessment reflects the
concentrated customer mix and limited geographic diversity for the combined
entity amid multiple industry risks facing automotive suppliers, including
volatile demand, high fixed costs, intense competition, severe pricing
pressures, and our expectations that North American production will continue
The company manufactures casts and machines and assembles fully engineered
chassis and powertrain components and modules for mostly U.S.-based automotive
original equipment manufacturers (OEMs) and Tier 1 suppliers.
Following the refinancing, we expect UC to have a leverage ratio of about 4x,
including our adjustments (primarily, the present value of operating leases),
and we expect it to remain between 3.5x and 4x over the next 12-18 months.
Over the longer term, we assume financial policies will be aggressive, given
the concentrated ownership and the potential for dividend distributions to
owners. Furthermore, we do not expect UC to generate free cash flow until
2014, given certain plant-specific operational issues and its need to make
investments in new capacity to meet somewhat higher volumes. The company was
formed by purchasing assets at prices that we think should support profitable
operations. Still, we consider UC's margins sensitive to future demand, given
its high operating leverage. The combined company has a limited overall track
record under new senior management and Platinum.
DMI has been facing operational issues at its important iron foundry in
Columbus, Ga., as a result of what we assume was underinvestment in prior
years, before the Platinum ownership, which led to higher-than-expected
operating costs because of excess labor, significant equipment downtime,
maintenance, and upgrade-related activity at that plant. Despite the
operational issues and the ongoing execution risk involved in managing launch
activity over the next two quarters, in our base case we assume the company's
implemented plan and additional investments to improve plant efficiency and
increase capacity will lead to some margin improvement into 2013.
Over the longer term, we assume improvement in margins will arise mostly as a
result of capacity consolidation, improved purchasing scale, and larger
in-house production capabilities after the integration. However,
synergy-related costs connected to the integration of various functional areas
of the stand-alone entities would be near-term headwinds for margins. We also
will closely monitor the progress on the execution of common accounting
policies, and internal controls--especially given some information quality
risks stemming from past misstatements in recent restated audits for SMW.
Our assessment of UC's business risk profile as "vulnerable" considers the
company's concentrated customer base to be a significant risk. More than
three-fourths of its revenues tie directly or indirectly to the domestic
operations of the U.S. automakers. These companies are currently all
profitable following multiyear restructurings but have varying track records.
Although vehicle production has recently increased amid the ongoing slow
recovery of U.S. auto demand, future production could remain highly volatile
given the weak economic outlook. Separately, we believe any significant market
share losses for Ford Motor Co. (BB+/Positive/--), General Motors Co.
(BB+/Stable/--), and Chrysler Group LLC (B+/Stable/--) would hurt UC.
We believe UC has a sizeable market share in its main segments and has the
potential to improve this over the longer term, given its full-service
capabilities across casting and machining for aluminium and iron. But we
believe that the market is still fragmented. Some competitors are in-house
operations of larger companies or automakers, while others are smaller and
more vulnerable. UC's contracts with its customers appear to provide a
reasonable buffer against raw-material cost increases. This is critical
because volatile raw-material costs had hurt certain acquired operations under
the previous owners. Also, UC has no pension or postretirement health care
obligations, and its union representation is manageable, in our view. Other
positives include a balanced end-market mix in terms of global program
sourcing on cars as well as light trucks, and the potential to leverage from
the trend toward aluminium-related sourcing from some large customers.
Although we believe UC has acquired some competitive technologies and
capabilities at attractive prices, we do not expect the company to have any
significant pricing leverage with its larger and more powerful customer base.
Also, geographic diversity is limited compared with many peers within the 'B'
rating category as most revenues are in North America and we expect this to be
the case in the near future.
A number of economic indicators remain weak in that end market: Sales in North
America 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 over the next 12-18 months 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. Our base-case scenario assumptions for UC's operating
performance over the next two years include:
-- Organic revenue growth in the mid-single digits;
-- An adjusted EBITDA margin over the next 12-18 months of about 7%-10%,
with most of the improvement in 2014 as a result of some integration-related
synergies (net of integration-related costs) and from actions to address
operational inefficiencies and lower variable overheads after the completion
of certain product launches;
-- Negative free cash flow in 2012 and into 2013, given our assumptions
of increased year-over-year capital expenditure requirements to support launch
activity coupled with higher investments in some of its plants, and
integration-related cash costs. We expect positive, albeit very modest, cash
flow generation in 2014 based on the margin improvements;
-- No debt reduction beyond the company's required annual amortization;
-- No meaningful dividends to shareholders.
We believe UC has "adequate" liquidity. Our assessment of UC's liquidity
profile incorporates the following expectations and assumptions:
-- We expect sources of liquidity, including available cash and funds
from operations, to easily exceed uses by 1.2x or more over the next 12 months.
-- We believe net sources would remain positive even if EBITDA declines
-- We assume more than 15% EBITDA headroom under its proposed leverage
Liquidity sources include availability under its asset-based lending (ABL)
facility, which is subject to a borrowing base, and it is the primary source
of liquidity, as we expect cash balances to be minimal. However, the amount
available may change depending on seasonal needs. Recently, one of the merged
entities, DMI, has been able to sustain liquidity with a
higher-than-anticipated drawdown under its unrated ABL (expiring in November
2016) and a recent capital support from Platinum, which we expect to the case
going forward, if a liquidity shortfall were to arise.
The stable outlook reflects our expectations that UC's leverage, pro forma for
the transaction, would be about 4x or less over the next year and that the
company will have more than 15% EBITDA headroom under its proposed leverage
covenant tests. But we also assume the company will not be cash flow positive
We could raise the ratings over the next year if the company sustainably turns
around recent inefficiencies in some of its plants, with increasing prospects
for achieving low double-digit EBITDA margins. This could lead to a revision
of business risk profile to "weak" from "vulnerable." For an upgrade, we would
also expect the company to generate positive free cash flow and sustain the
ratio of free operating cash flow to debt in the low- to mid-single digits.
Given our current leverage expectations, this would lead to us revising the
financial risk profile to "aggressive" from "highly leveraged."
We could lower the ratings if weaker-than-expected operating performance would
lead to adjusted leverage exceeding well above 5x with a reduction in
liquidity and increased prospects for negative free operating cash flow even
in 2014. This could occur if the company increases borrowings under its ABL
for meaningfully higher-than-anticipated investments in upgrading certain
facilities and to fund product-launch-related costs, further weakening its
liquidity. This could also occur if it appears unlikely for EBITDA margins in
2014 to improve toward our base case, while revenue growth and working capital
performance are less favorable than we expect.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18,
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
New Rating; Stable Outlook
UC Holdings Inc.
Corporate Credit Rating B/Stable/--
Concord International Inc.
Diversified Machine Inc.
US$237 mil bank ln due 2018 B
Recovery Rating 4
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left