Dec 14 -
Summary analysis -- Autoliv Inc. ---------------------------------- 14-Dec-2012
CREDIT RATING: BBB+/Stable/A-2 Country: Sweden
Primary SIC: Motor vehicle
Mult. CUSIP6: 052800
Credit Rating History:
Local currency Foreign currency
27-Jul-2010 BBB+/A-2 BBB+/A-2
26-Nov-2009 BBB/A-2 BBB/A-2
19-Feb-2009 BBB-/A-3 BBB-/A-3
21-Nov-2008 BBB+/A-2 BBB+/A-2
The ratings on Autoliv Inc., the parent company of the Sweden-based Autoliv group, reflect our view of the company’s leading market position in auto safety products, principally seat belts and air bags. The Autoliv group supplies leading global automotive original equipment manufacturers (OEMs) and has a stronger and more diverse customer and geographic mix than is typical in the automobile components industry. These strengths are offset by the close correlation of safety-system demand to cyclical new auto sales and recurring pricing pressure from OEMs. Accordingly, we assess Autoliv Inc.’s business risk profile as “satisfactory.” We classify the company’s financial risk profile as “intermediate” in view of its cyclical profitability but generally positive free operating cash flow. Despite particularly strong credit metrics and liquidity over the past two years, we view the company’s financial policies of maintaining net debt to EBITDA below 3.0x and EBITA to net interest of over 2.75x as only “moderate.” We expect higher future borrowings to fund shareholder returns, acquisitions, and payment of a fine to settle the remaining European price-fixing investigation. As of Sept. 30, 2012, Autoliv had committed facilities in place and scope to increase borrowings by at least $1 billion within the company’s financial policies and the current ratings.
S&P base-case operating scenario
In the first nine months of 2012, Autoliv experienced a gradual decrease in revenue growth due to weak European sales and slower demand growth in China. The group should achieve its revenue target for 2012, with organic growth of about 4% largely offset by the negative currency effect.
In July, the company revised down its 2012 EBIT margin target. Autoliv now expects an operating margin of more than 9.5% (excluding costs for capacity alignments and antitrust investigations), down from 10.9% and 12.7% reported in 2011 and 2010 respectively. In our base-case scenario, we assume an operating margin of about 9.5% for the current year. Weak European demand is set to continue in 2013. Autoliv benefits from its good market diversification but clearly the strong momentum observed in 2010 and 2011 is over. For the coming quarters, we assume that sales will be supported by the increasing penetration of passive safety devices in non-mature markets. Active safety system revenues will grow rapidly, but will likely only account for a small proportion of total sales in the near term, in our view.
S&P base-case cash flow and capital-structure scenario
For 2012, we expect Autoliv’s ratio of funds from operations (FFO) to debt to stay in the three digit range, after our adjustments--it was 283% in 2011. Leverage was subsequently reduced by the deferred equity subscription proceeds settled in April 2012.
We believe Autoliv should be able to cover any likely EU legal fines, exceptional shareholder payouts, and midsize acquisitions, while remaining within its financial policies. The company’s financial targets, for instance, include a maximum debt-to-EBITDA ratio of “significantly below 3x”. Looking at 2012 expected credit metrics, we consider Autoliv able to meet about $1 billion of mandatory or discretionary payouts at the current rating level. We base this assessment on our estimate that Autoliv will generate about $1.0 billion in EBITDA and more than $0.3 billion of adjusted free operating cash flow (FOCF) annually in 2012.
The short-term rating on Autoliv is ‘A-2’. We assess the company’s liquidity and financial flexibility as “strong,” as defined in our criteria.
-- On Sept. 30, 2012, liquidity sources consisted of $908 million of cash and short-term investments and full availability under a $1.1 billion committed credit facility that has been extended to April 2017.
-- This compares with $158 million in short-term debt on the same date. We estimate that Autoliv will generate FOCF of at least $300 million in 2012. The company’s liquidity position was further bolstered in May 2012 with receipt of the deferred equity subscription proceeds of $106 million in new equity.
Available liquidity sources are ample to meet annual dividend payments and other likely requirements by a substantial margin and exceed our criteria benchmarks.
The company has a Swedish krona (SEK) 7.0 billion (about $1.02 billion) commercial paper (CP) program and a $1 billion U.S. CP program.
The stable outlook reflects our view that Autoliv’s solid operating performance and currently strong financial metrics will enable it to weather potential slowdowns in Europe and some other markets as well as possible fines stemming from the European Commission investigation. The outlook also reflects our expectation that the company will remain committed to balancing investments, dividends, and acquisitions in line with at least an “intermediate” financial profile. At the current rating level, we see headroom to accommodate acquisitions and special shareholder payments of about $1 billion, depending on what the payments are for.
We would consider raising the rating if Autoliv demonstrated sustainably stronger and more stable profitability or commitment to maintaining what we consider a modest financial risk profile. We believe Autoliv could maintain its current credit measures, which exceed what we consider commensurate with the ‘BBB+’ rating, absent much higher shareholder payouts. These metrics include FFO to debt of about 40%, debt to EBITDA of about 2.5x, and FOCF to debt of 15%-20%.
A combination of adverse market conditions, legal penalties, very generous dividend payouts, or share buybacks might weaken the company’s credit measures to below what we see as rating-commensurate, leading to a negative rating action.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Business And Financial Risks In The Auto Component Suppliers Industry, Jan. 28, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008