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TEXT-S&P assigns UC Holdings 'B' ratings
November 14, 2012 / 7:11 PM / 5 years ago

TEXT-S&P assigns UC Holdings 'B' ratings

Overview
     -- 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 
Advisors LLC.
     -- 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 
2014.

Rating Action
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.

Rationale
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 
to rise.

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; 
and
     -- No meaningful dividends to shareholders.

Liquidity
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 
by 15%.
     -- We assume more than 15% EBITDA headroom under its proposed leverage 
covenant tests.

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.
Outlook
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 
until 2014.

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, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008


Ratings List
New Rating; Stable Outlook 

UC Holdings Inc.
 Corporate Credit Rating                B/Stable/-- 

New Rating

Concord International Inc.
Diversified Machine Inc.
 Senior Secured
  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 
column.

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