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Fitch Rates TRW's Proposed Notes 'BBB-'
November 18, 2013 / 3:16 PM / 4 years ago

Fitch Rates TRW's Proposed Notes 'BBB-'

(The following statement was released by the rating agency) CHICAGO, November 18 (Fitch) Fitch Ratings has assigned a rating of 'BBB-' to TRW Automotive, Inc.'s (TAI) proposed $400 million in senior unsecured notes due 2023. TAI is a subsidiary of TRW Automotive Holdings Corp. (TRW). The Issuer Default Rating 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 direct and indirect wholly-owned domestic subsidiaries. In the future, the notes will be guaranteed by each wholly-owned domestic subsidiary that also guarantees certain other debt. Proceeds from the proposed notes will be used for general corporate purposes, including the retirement of TAI's senior notes that mature in March 2014. As of Sept. 27, 2013, a total of $462 million in March 2014 notes were outstanding. Also, the company has exercised the soft call provision of its 8.875% notes due 2017, and those notes will be called on Dec. 2, 2013. A portion of the proceeds from the proposed notes may be combined with proceeds from TAI's February 2013 issuance of $400 million in senior unsecured notes to fund the redemption of the 8.875% notes. As of Sept. 27, 2013, $205 million of 8.875% notes were outstanding. Extra liquidity from the proposed notes could also help provide a cash cushion for the company in case it incurs any significant payments related to its antitrust case in Europe. KEY RATING DRIVERS TRW's ratings are supported by the auto supplier's relatively strong credit profile, which is characterized by low leverage, high margins and positive free cash flow. TRW continued to record positive free cash flow in the 12 months ended Sept. 27, 2013 despite ongoing weakness in light vehicle production in several of the company's key markets, particularly Western Europe, and continued construction of 11 new plants, including nine in China. Although the company's EBITDA margin (as calculated by Fitch) was 9.8% in the latest 12-month period, down from 10.2% in the corresponding period a year earlier, it remained relatively strong for the auto supply industry and has been trending upwards over the past several quarters. Fitch expects TRW will continue to produce positive free cash flow over the intermediate term despite higher capital spending, which will provide the company with ongoing financial flexibility. While there are notable risks to TRW's credit profile, Fitch believes the company has the financial strength to withstand several negative developments while maintaining an investment grade profile. Rating concerns include industry cyclicality, raw material cost volatility, and TRW's significant European market exposure. Mitigating these concerns somewhat is the diversity of the company's global customer base and its increasing penetration rate on a number of vehicle platforms, which has helped to support sales in weaker markets. In Europe, where about 43% of the company's s revenue was derived in 2012, Volkswagen AG, the strongest of Europe's volume manufacturers, is TRW's largest customer, and TRW has continued to perform well in the region despite the decline in Western European vehicle production. It is notable, too, that the company produced positive free cash flow during the last downturn, and today it is better positioned to withstand another demand shock, with a lower cost structure and a stronger balance sheet. Another risk is the potential for an adverse outcome resulting from the ongoing antitrust investigation in Europe. The U.S. Department of Justice concluded its own investigation in 2012, resulting in a fine of only $5.1 million. Although the U.S. fine was relatively low, a fine from the European investigation could be substantially higher. Fitch notes, however, that these types of investigations can take years to resolve, so it is possible that there may not be a resolution to the issue in the near term. Fitch will evaluate the effect of the investigation on TRW's credit profile when more information becomes available, but the company's strong liquidity position and positive free cash flow will help to mitigate the effect on the company's credit profile of any required cash payments related to the investigation. In the fourth quarter of 2012, TRW initiated a $1 billion share repurchase program that was slated to run through Dec. 14, 2014. In October 2013, the company increased the program by an additional $1 billion and extended the duration of the program by two years to Dec. 31, 2016. As of Oct. 30, 2013, TRW had remaining share repurchase authorization of $1.47 billion and had purchased $460 million in shares in the first nine months of 2013. Although the size of the repurchase program is significant, Fitch expects TRW to primarily fund it with free cash flow and cash on hand. Fitch also expects that management will be judicious in its repurchase activity and will slow or stop the program if free cash flow turns out to be weaker than expected. As such, Fitch does not expect the repurchase program 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 Sept. 27, 2013 was 1.1x, with $1.9 billion in debt and 12-months EBITDA (as calculated by Fitch) of $1.7 billion. Total liquidity at the end of the third quarter included $1 billion in cash and cash equivalents and $1.4 billion in revolver availability. Free cash flow for the 12 months ended Sept. 27, 2013 was $242 million, down from $261 million in the corresponding period a year earlier, on higher capital spending 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 2014 due to the facilities investments. RATING SENSITIVITIES The Stable Outlook for TRW and TAI suggests that a near-term change in the ratings is unlikely. Longer-term, Fitch could consider a positive rating action if global auto market conditions improve, particularly in Europe, resulting in increased profitability and free cash flow. In particular, sustained EBITDA margins in the low- to mid-teens could contribute to a positive rating action. Other factors that could lead to a positive rating action would be sustained leverage in the low 1.0x range and consistent free cash flow margins in the mid-single digit range. On the other hand, a meaningful slowdown in the global automotive market that leads to significant margin pressure and negative free cash flow for a sustained period could lead Fitch to undertake a negative rating action. A very adverse outcome from the European antitrust investigation or a company decision to significantly increase leverage to fund shareholder-friendly activities could also result in a negative rating action. However, Fitch believes there is substantial cushion within the current ratings to withstand several adverse developments before a negative rating action would be considered. 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 Jason Pompeii Senior Director +1-312-368-3210 Media Relations: John Baron, Bogota, Tel: +57 1 326 9999, Email: johnfreddy.ochoa@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --Corporate Rating Methodology (Aug. 5, 2013); --Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (Nov. 13, 2012); --Evaluating Corporate Governance (Dec. 12, 2012); --Treatment of Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis (Dec. 13, 2012). Applicable Criteria and Related Research: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers here Evaluating Corporate Governance here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Additional Disclosure Solicitation Status 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 WEBSITE '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. 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.

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