September 18, 2017 / 7:57 PM / a month ago

Fitch Rates Meritor's Proposed Convertible Notes 'B+/RR4'

(The following statement was released by the rating agency) CHICAGO, September 18 (Fitch) Fitch Ratings has assigned a rating of 'B+/RR4' to Meritor, Inc.'s (MTOR) proposed private placement of $300 million in senior unsecured convertible notes due 2037. MTOR's Long-Term Issuer Default Rating (IDR) is 'B+' and its Rating Outlook is Stable. A full list of MTOR's ratings is included at the end of this release. The proposed notes will be guaranteed by each of MTOR's subsidiaries who also guarantee its secured revolving credit facility. The company intends to use the net proceeds from the proposed notes to refinance existing debt. MTOR's senior unsecured notes, including the proposed notes, are rated 'B+/RR4', reflecting Fitch's expectations of average recovery prospects in the 31% to 50% range in a distressed scenario. MTOR expects to grant the initial purchasers of the notes an option to purchase up to an additional $25 million in principal amount of the notes, potentially taking the total amount issued to $325 million. KEY RATING DRIVERS MTOR's ratings reflect the fundamental improvement seen in the company's credit profile over the past several years resulting from its work to strengthen its balance sheet, improve its cost structure and grow its customer base. The ratings also incorporate the company's strong market position as a supplier of axles and brakes in the highly cyclical commercial truck and off-highway vehicle sectors. The improvement in the company's credit profile has been particularly evident in its ability to produce positive FCF for each of the past several years, even while the North American commercial truck market went through a particularly steep downturn. Over the longer term, MTOR is well-positioned for the nascent turnaround in its key end markets, which could provide it with opportunities to further strengthen its credit profile. Despite the improvements, Fitch has several significant rating concerns. Chief among these is the relatively extreme cyclicality of the global commercial truck and off-highway vehicle markets. This heavy volatility can make credit profile improvement challenging and heightens the importance of maintaining relatively conservative mid-cycle credit metrics. Other concerns include heavy competition in the commercial truck driveline sector, particularly in North America, as well as volatile raw material costs, which can pressure margins despite pass-through mechanisms in many customer contracts. MTOR's heightened interest in potential acquisitions and ongoing share repurchase activity are also concerns, although Fitch does not expect these activities to drive a material increase in long-term leverage. As of June 30, 2017, MTOR's debt (including off-balance-sheet factored receivables) totaled $1.3 billion and LTM Fitch-calculated EBITDA at the time was $317 million (including dividends received from minority joint ventures), leading to Fitch-calculated EBITDA leverage of 4.1x. FFO adjusted leverage was 3.6x. MTOR's EBITDA margin was 9.0% in the LTM ended June 30, 2017 (excluding the effect of minority joint venture dividends). Fitch-calculated FCF in the LTM ended June 30, 2017 was $56 million, leading to a FCF margin of 1.8%. MTOR remains focused on debt reduction, and in August 2017, the company called for redemption of $100 million of its existing 6.75% convertible notes due 2021. In September 2017, MTOR announced that it agreed to sell its 50% stake in its Meritor WABCO Vehicle Control Systems (Meritor WABCO) joint venture to its partner for $250 million and use a portion of the proceeds to redeem the remaining $175 million in 6.75% convertible notes. Fitch expects debt to decline as a result of these transactions, although the effect on EBITDA leverage will be partially offset by the loss of dividends from the Meritor WABCO joint venture. In early September 2017, following a decision by the U.S. Court of Appeals for the Sixth Circuit, MTOR modified benefits that will be paid to certain former United Auto Workers (UAW) represented employees. As a result of the benefits modification, MTOR's benefit liability is expected to be reduced by $315 million. The associated reduction in cash benefit payments is expected to improve FCF by about $17 million in fiscals 2018 and 2019 versus $32 million in payments in fiscal 2017. Likewise, EBITDA is expected to improve by about $40 million annually in fiscals 2018 and 2019 as a result of the changes. Pro forma for the benefit modifications, LTM EBITDA leverage at June 30, 2017 would have been 3.7x and the FCF margin would have been 2.3%. DERIVATION SUMMARY MTOR is among the smaller public capital goods suppliers, with product lines focused on driveline components and brakes for commercial vehicles, off-highway equipment and trailers. Compared with its primary competitor, Dana Incorporated, MTOR is smaller and fully focused on the capital goods industry, without any meaningful light vehicle exposure. That said, MTOR generally retains a top-three market position in most of the product segments where it competes. Compared with other industrials rated below investment grade, such as Tenneco Inc., The Goodyear Tire and Rubber Company or Allison Transmission Holdings, Inc., MTOR's leverage is relatively high and margins are lower. MTOR's EBITDA leverage has generally fluctuated in the high-3x to low-4x range over the past several years, which is roughly 1x to 1.5x higher than most issuers in the 'BB' category. That said, EBITDA margins recently have been in the high-single-digit range and annual FCF has been consistently positive over the past several years, which could lead to further credit profile improvement over the longer term. KEY ASSUMPTIONS Fitch's key assumptions within its rating case for the issuer include: --In North America, the commercial truck cycle reaches a trough in mid-fiscal 2017 and begins to grow thereafter; --Revenue grows slightly in fiscal 2017 on modestly improving end-market demand, but grows more solidly in the following years on improved market conditions and new business wins; --FCF remains positive over the next several years, with FCF margins in the low-single-digit range; --Capital expenditures run at about 2.5% to 3% of revenue over the next several years, in-line with recent capital spending levels; --The company generally maintains cash balances in the $150 million to $170 million range, with excess cash used for share repurchases or modest acquisitions. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Maintaining EBITDA leverage below 3.5x and through the cycle; --Maintaining FFO adjusted leverage below 4.5x through the cycle; --Maintaining a FCF margin of 1.5% or higher through the cycle; --Maintaining an EBITDA margin above 9% through the cycle. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --A material deterioration in the global commercial truck or industrial equipment markets for a prolonged period; --An increase in EBITDA leverage to above 4.5x through the cycle; --An increase in FFO adjusted leverage to above 5.5x through the cycle; --A decline in the FCF margin to below 0.5% through the cycle; --A decline in the EBITDA margin to below 8% through the cycle. LIQUIDITY Fitch expects MTOR's liquidity to remain adequate over the intermediate term. At June 30, 2017, the company had $231 million in cash and cash equivalents, which was higher than normal. Typically, the company has carried between $150 million and $200 million in cash on its balance sheet. In addition to its cash, MTOR has access to a $525 million secured ABL revolving credit facility that was fully available at June 30, 2017. Based on its criteria, Fitch treats non-U.S. cash, as well as cash needed to cover seasonal changes in working capital and other obligations, as "not readily available" for purposes of calculating net metrics. Therefore, Fitch has treated $129 million of MTOR's consolidated cash as "not readily available" in its calculations. FULL LIST OF RATINGS Fitch currently rates MTOR as follows: --Long-Term IDR 'B+'; --Secured revolving credit facility rating 'BB+/RR1'; --Senior unsecured notes rating 'B+/RR4'. The Rating Outlook is Stable. Contact: Primary Analyst Stephen Brown Senior Director +1-312-368-3139 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Craig D. Fraser Managing Director +1-212-908-0310 Committee Chairperson Eric Ause Senior Director +1-312-606-2302 Relevant Committee Date: Jan. 30, 2017 Summary of Financial Statement Adjustments - Fitch has adjusted MTOR's debt to include off-balance-sheet factored receivables. Also, for purposes of calculating EBITDA-based metrics, Fitch has included dividends received from equity method investments in its calculation of EBITDA. However, Fitch has not included these dividends in its standalone calculations of EBITDA or the EBITDA margin. Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers - Effective from 21 November 2016 to 16 June 2017 (pub. 21 Nov 2016) here Additional Disclosures Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below