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Fitch Rates Meritor's Add-On Notes 'B/RR4'
June 8, 2015 / 5:33 PM / 2 years ago

Fitch Rates Meritor's Add-On Notes 'B/RR4'

(The following statement was released by the rating agency) CHICAGO, June 08 (Fitch) Fitch Ratings has assigned a rating of 'B/RR4' to Meritor, Inc.'s (MTOR) add-on offering of $225 million in 6.25% senior unsecured notes due 2024. MTOR's Issuer Default Rating (IDR) is 'B' and the Rating Outlook is Positive. The new notes are an add-on to MTOR's existing $225 million in senior unsecured notes due 2024 and will form a single series with the existing notes. As such, the new notes will be guaranteed on an unsecured basis by each of MTOR's current and future subsidiaries that also guarantee the company's secured credit facility. MTOR intends to use proceeds from the new notes to purchase an annuity that will satisfy its obligations under a German pension plan, as well as replenish the company's cash after previously redeeming $78 million of its 7.875% convertible notes due 2026. Remaining proceeds will be used for general corporate purposes. KEY RATING DRIVERS MTOR's ratings reflect the company's relatively strong market position as a supplier of axles and brakes in the highly cyclical commercial and off-road vehicle sectors. Although the company's top line has been pressured by weak global market conditions and foreign exchange translation over the past several years, the company's profitability and credit protection metrics have begun to improve as the company's M2016 plan gains traction. Over the past two years, the company has used free cash flow and proceeds from stake sales to reduce debt and improve the funded status of its pension plans, and in fiscal year (FY) 2014, it used proceeds from its share of a legal settlement with Eaton Corporation plc (Eaton) to further bolster its pension plans. Looking ahead, Fitch expects MTOR's financial flexibility to improve as it continues to lower its cost structure and strengthen its balance sheet. The global commercial and off-road vehicle markets remain highly cyclical, and although the North American commercial truck market remains near its cyclical peak, the South American, European and Asian markets are still relatively weak. This will constrain MTOR's ability to grow revenue over the next couple of years, as will declining defense-related demand. Although MTOR's more-flexible cost structure is better equipped to manage through market cycles, tepid demand in certain regions could make reaching some of the company's M2016 goals more challenging. Competition in the industry remains high as well, but the recent renewal of MTOR's multi-year supply agreements with AB Volvo and Daimler AG, as well as a new business with PACCAR Inc., will help to cement much of its core commercial vehicle business for the next several years. Despite uneven global market conditions, MTOR continues to have solid financial flexibility. The company's liquidity position at March 29, 2015 included $207 million in cash and cash equivalents, full availability of $499 million on its secured revolver, and $69 million of availability on its U.S. receivables securitization facility. Free cash flow (FCF) in the 12 months ended March 29, 2015 was $167 million, leading to a FCF margin of 4.6%. Cash obligations tied to debt maturities are minimal over the intermediate term, although the company has $55 million in convertible notes that contain a put and call feature that allows for early redemption in FY2016. As of March 29, 2015, the face value of MTOR's debt stood at $996 million. Fitch-calculated EBITDA in the 12 months ended March 29, 2015 was $317 million, leading to Fitch-calculated leverage (debt/Fitch-calculated EBITDA) of 3.1x. However, lease-adjusted leverage, including off-balance-sheet debt was 4.1x and FFO-adjusted leverage was 5.0x. EBITDA interest coverage was 3.3x at March 29, 2015. Fitch expects MTOR's credit protection metrics to improve modestly over the intermediate term as the global truck and industrial equipment markets strengthen and as the company makes further progress on its M2016 initiatives. KEY ASSUMPTIONS --The global truck and industrial equipment markets grow moderately in FY2015 and beyond. --MTOR calls its $55 million in 4.265% convertible notes in FY2016. --Capital spending equals about 2% to 2.5% of revenue over the intermediate term. --The company uses excess cash to repurchase shares, keeping its cash position roughly near the year-end FY2014 level. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Maintaining EBITDA leverage below 4.0x and lease-adjusted leverage (lease-adjusted debt, including off-balance-sheet debt/EBITDAR) below 4.5x through the cycle; --Producing positive FCF on a consistent basis; --Maintaining an EBITDA margin above 8% through the cycle. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --A material deterioration in the global commercial truck or industrial equipment markets for a prolonged period; --An increase in EBITDA leverage to above 5.0x and lease-adjusted leverage (lease-adjusted debt, including off-balance-sheet debt/EBITDAR) above 5.5x through the cycle; --A decline in the EBITDA margin to below 6% through the cycle. Fitch maintains the following ratings on MTOR: --IDR 'B'; --Secured revolving credit facility 'BB/RR1': --Senior unsecured notes 'B/RR4'. The Rating Outlook for MTOR is Positive. Contact: Primary Analyst Stephen Brown Senior Director +1-312-368-3139 Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602 Secondary Analyst Craig Fraser Managing Director +1-212-908-0310 Committee Chairperson Eric C. Ause Senior Director +1-312-606-2302 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available on www.fitchratings.com 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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