Feb 25 - Fitch Ratings has assigned a rating of 'BBB-' to TRW Automotive,
Inc.'s (TAI) proposed $400 million in senior unsecured notes due 2021. TAI is a
subsidiary of TRW Automotive Holdings Corp. (TRW). The Issuer Default
Rating (IDR) for both TRW and TAI is 'BBB-' and the Rating Outlook is Stable.
The proposed notes will be issued through a 144A offering and will be guaranteed
by substantially all of TAI's existing and future direct and indirect wholly
owned domestic subsidiaries. Although the company has not been explicit in how
it expects to use the funds, other than for general corporate purposes, Fitch
notes the company has several potential calls on cash over the next 18 months.
These include a $533 million note maturity in the first quarter of 2014 and the
option to call its $219 million in 8.875% bonds in December 2013. Extra
liquidity from the notes could also provide a cash cushion in case the company
incurs any significant cash payments related to its antitrust case in Europe.
KEY RATING DRIVERS
The ratings of TRW and TAI reflect the auto supplier's relatively strong credit
profile, which is characterized by low leverage, high margins and consistently
positive free cash flow. TRW continued posted positive free cash flow in 2012
despite weak light vehicle production levels in several of the company's key
markets, particularly Western Europe. Although its EBITDA margin (as calculated
by Fitch) of 9.8% was down from 10.6% in 2011, it remained relatively strong for
the industry and was weighed upon by costs associated with building 11 new
plants, including nine in China, that will come on line over the next 24 months.
Looking ahead, Fitch expects the company to continue producing positive free
cash flow over the intermediate term, despite increased capital spending, which
will provide the company with meaningful financial flexibility. While there are
meaningful risks to TRW's credit profile, Fitch believes the company has the
financial strength to withstand several negative developments while retaining an
investment grade profile.
Concerns include the cyclical nature of the auto industry, volatility in raw
material costs, and TRW's significant exposure to the European auto market.
These concerns are mitigated somewhat by the company's diverse global customer
base and increasing penetration rates on a number of vehicle platforms, which
has helped to support sales in weakened markets. TRW's relatively heavy exposure
to Europe, where nearly 43% of its 2012 revenue was generated, is of particular
concern, although Fitch notes that Volkswagen AG, financially the strongest of
Europe's volume manufacturers, is TRW's largest customer, and TRW has continued
to perform well despite the sharp decline in production in the region. TRW
produced positive free cash flow through the last downturn, and the company is
better positioned today to withstand another demand shock in the intermediate
term, with a lower cost structure and stronger balance sheet.
Another meaningful risk is the potential for an adverse outcome resulting from
an ongoing antitrust investigation in Europe. The U.S. Department of Justice
(DOJ) concluded its own investigation last year, and TRW paid a $5.1 million
fine. Investigations like this one can take years to resolve, so there may not
be a near-term resolution to the issue. However, the relatively low fine paid
following the DOJ investigation could bode well for the outcome of the European
case. Fitch will evaluate the effect of the investigation on TRW's credit
profile when more information becomes available, however the company's
substantial liquidity and positive free cash flow will help mitigate the effect
of any required cash outlays on its credit profile.
In the fourth quarter of 2012, TRW initiated a $1 billion share repurchase
program that runs through Dec. 14, 2014. As of Dec. 31, 2012, the company had
repurchased $268 million in shares, and the company has stated that it expects
to purchase another $500 million in shares in 2013. Although the size of the
program is significant, Fitch expects the company to fund it using free cash
flow and cash on hand. Fitch also expects that management will be judicious in
its repurchase activity, slowing or stopping the program if free cash flow is
weaker than expected, so the program is not likely to have a detrimental effect
on the company's overall credit profile.
TRW's credit profile is strong for the auto supply industry. Leverage
(debt/Fitch-calculated EBITDA) at year end 2012 was 0.9x, with $1.5 billion in
debt and full-year EBITDA (as calculated by Fitch) of $1.6 billion. Total
liquidity at year end 2012 included $1.2 billion in cash and cash equivalents
and $1.4 billion in revolver availability. Free cash flow for the year was $333
million, down from $549 million in 2011, on weaker operating conditions in
Europe and as the company continued to invest in the aforementioned new
manufacturing facilities. Fitch expects free cash flow to remain solidly
positive over the intermediate term as operating cash flow more than offsets
capital spending, which will likely remain elevated through 2013 on the
The Stable Rating Outlook on TRW and TAI indicates that a near-term change in
the ratings is not likely. Longer term, Fitch could consider a positive rating
action if leverage remains low and free cash flow, margins and liquidity remain
strong for an extended period. On the other hand, Fitch could consider a
negative rating action if global auto production declines sharply or if the
company undertakes a large, debt-financed acquisition. A significant increase in
long-term debt to support shareholder-friendly actions would also be viewed
negatively by Fitch, although share repurchases or dividends funded through
operating cash flow could be consistent with the ratings, provided the company
maintains sufficient liquidity to fund its operations through the cycle.
Additional information is available at 'www.fitchratings.com'. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Nov. 13, 2012);
-'-Evaluating Corporate Governance' (Dec. 12, 2012);
--'2013 Outlook: U.S. Auto Manufacturers and Suppliers' (Dec. 17, 2012).
Applicable Criteria and Related Research
2013 Outlook: U.S. Auto Manufacturers and Suppliers
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance