Reuters logo
Fitch Upgrades American Axle's IDR to 'BB'; Outlook Stable
October 3, 2016 / 3:46 PM / a year ago

Fitch Upgrades American Axle's IDR to 'BB'; Outlook Stable

(The following statement was released by the rating agency) CHICAGO, October 03 (Fitch) Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) of American Axle & Manufacturing Holdings, Inc. (AXL) and its subsidiary American Axle & Manufacturing, Inc. (AAM) to 'BB' from 'BB-'. Fitch has also affirmed the rating on AAM's secured revolving credit facility at 'BB+/RR1'. Fitch has upgraded AAM's senior unsecured notes rating to 'BB/RR4' from 'BB-/RR4'. A full list of rating actions follows at the end of this release. AAM's ratings apply to a $523.5 million secured revolving credit facility and $1.35 billion in senior unsecured notes. The Rating Outlooks for both AXL and AAM are Stable. KEY RATING DRIVERS The upgrade of the IDRs for both AXL and AAM is driven by improvement in the company's credit metrics, consistently solid FCF generation and increased customer, product and geographical diversification. Although the company remains heavily reliant on General Motors Company's (GM) full-size truck program, it continues to add new business with a variety of U.S., European and Asian auto manufacturers, and 60% of its new business backlog over the 2016 to 2018 time frame is for customers other than GM. This increased diversification has been partly driven by AXL's EcoTrac disconnecting all-wheel drive system, which was initially offered on two Fiat Chrysler Automobiles NV (FCA) platforms, but will be offered on several other auto manufacturers' platforms over the next several years. AXL also continues to invest in other new technologies, such as its e-AAM electronic drive system, which will give it more exposure to the growing hybrid and electric vehicle markets, and its QUANTUM lightweight axle components. Fitch's concerns include the continued concentration of AXL's revenue base, despite its enhanced diversification; heavy competition in the light vehicle driveline market; the loss of a portion of its content on the next full-size GM truck platform; and the sensitivity of the company's credit metrics to changes in its operating performance. Although AXL will continue to diversify its book of business over the intermediate term, GM is likely to remain the company's largest customer by a wide margin for a number of years, with GM's full-size truck platform contributing substantially to the company's results. Fitch expects competition in the light-vehicle driveline market to remain heavy over the coming years, especially as AXL attempts to gain a foothold with auto manufacturers it has not worked with before. Other, larger suppliers also offer similar driveline technologies that offer some of the same benefits of those being marketed by AXL. The company has also shown in the past that its credit metrics can deteriorate quickly in the event of a decline in its operating performance. In 2015, AXL was selected as a target supplier under GM's Strategic Sourcing Program (SSP) to provide axles and driveline equipment for future generations of GM's full-size light truck and SUV program, potentially locking in AXL on the program for more than a decade. However, in conjunction with achieving target supplier status, AXL expects that GM will procure 25% of AXL's current content from other sources. Fitch views the loss of this high-margin business as a credit negative and estimates that the content that will be lost accounted for roughly 12% to 13% of AXL's revenue base in 2015. Fitch expects that AXL will not see any effect of this lost business for at least two years, giving the company time to reallocate the capacity to other programs. As of June 30, 2016, AXL had secured new future business sufficient to replace 60% of what it expects lose from the GM light truck program. Fitch believes the company has the ability to replace more of the lost business, but the new programs are likely to carry lower margins, given the significant scale efficiencies that AXL realizes on the GM full-size light truck program. Since the last recession, AXL has primarily targeted its cash deployment toward organic business investments and strengthening its balance sheet. With a stronger balance sheet, and with the company producing solid FCF on a consistent basis, it has broadened its cash deployment plans. In May 2016, AXL announced a relatively modest $100 million share repurchase program that runs through year-end 2018, and the company has begun to consider the possibility of inorganic growth opportunities. Fitch expects the share repurchase program will be funded with FCF, with no impact on long-term debt, and that the company would slow repurchase activities if it needed to conserve cash. As of June 30, 2016, AXL had spent only $1.5 million on share repurchases under the program. The effect of an acquisition on AXL's credit metrics would depend on the size of the transaction and the amount of any incremental debt, but after an acquisition the company would likely focus on reducing incremental leverage resulting from the acquisition. Fitch expects AXL to produce solidly positive FCF over the intermediate term, with FCF margins generally running in the low- to mid-single digit range. Fitch expects capital spending as a percentage of revenue to run at about 5% over the intermediate term, although it is likely to run closer to 6% in 2016 due to new projects coming on line within the next year. FCF in the LTM ended June 30, 2016 was $199 million, equal to a 5.1% FCF margin, supported, in part, by strong production volumes in GM's full-size light truck program. Fitch expects AXL's FCF margin to run in the low-3% range for the full year 2016, down from 4.7% in 2015, primarily as a result of the higher capital spending. Fitch expects AXL's EBITDA leverage to run in the low- to mid-2x range over the next several years, primarily as a function of changes in EBITDA. Debt is likely to remain near the current $1.4 billion level, as the company has no significant debt maturities until 2019, although its secured revolver comes due in 2018. Fitch expects lease-adjusted EBITDAR leverage to run in the mid-2x over the intermediate term, while funds from operations (FFO) adjusted leverage is likely to run closer to the mid- to high-2x range. As of June 30, 2016, AXL's actual EBITDA leverage (debt/Fitch-calculated LTM EBITDA) was 2.3x, lease adjusted EBITDAR leverage was 2.6x and FFO adjusted leverage was 3.2x. Fitch expects AXL's liquidity to remain adequate over the intermediate term. At June 30, 2016, AXL had $388 million in unrestricted cash and cash equivalents, augmented by $513 million of availability on its secured revolver (after accounting for about $10 million in letters of credit backed by the facility). Fitch estimates that about 56% of the company's unrestricted cash and cash equivalents was located outside the U.S. AXL's pension plans remain relatively well funded. At year-end 2015, the company's plans were 88% funded, with an unfunded status of $80 million. The company contributed $20 million to its pension plans in 2015. Due to prefunding balances, AXL has no required plan contributions in 2016, although it could make voluntary contributions to the plans. Given AXL's liquidity and FCF prospects, Fitch does not view the company's pension plans as a meaningful credit risk. The Recovery Rating of 'RR1' assigned to AAM's secured revolving credit facility reflects its collateral coverage, which includes virtually all the assets of AXL and AAM, leading to expected recovery prospects in the 90% to 100% range in a distressed scenario. The Recovery Rating of 'RR4' assigned to AAM's senior unsecured notes reflects Fitch's expectation that recovery prospects would be average, in the 30% to 50% range, in a distressed scenario. KEY ASSUMPTIONS --U.S. light vehicle sales run in the low- to mid-17 million range in 2016, and global sales rise in the low-single digit range; --After 2016, U.S. industry sales plateau at around 17 million, while global sales continue to rise modestly in the low-single digit range; --Over the longer term, the company replaces the lost GM light truck business with new business at a lower margin; --Debt remains steady around $1.4 billion over the next several years; --Capital spending runs at about 6% of revenue in 2016 due to a program coming on line over the next year, and beyond 2016 capital spending runs at about 5% of revenue; --The company keeps between $250 million and $300 million in consolidated cash on hand, with any excess cash used for share repurchases or, potentially, an acquisition; --The company completes its $100 million share repurchase program by year-end 2018. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Continued progress on diversifying the company's revenue base; --Sustained FCF margins of 3.5% or higher; --Sustained EBITDA leverage in the low- 2x range; --Sustained FFO adjusted leverage in the mid- 2x range; --Successfully replacing the lost 25% of the GM full-size light truck and SUV revenue with new business. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: --Significant production inefficiencies and associated cash burn tied to the start-up of new programs; --A rise in EBITDA leverage to above 3x for a sustained period; --A rise in FFO adjusted leverage to 3.5x or higher for a sustained period; --A sustained decline in the EBITDA margin to below 10%; --Sustained FCF margins below 2%; --A prolonged disruption in the production of GM's full-size pickups and SUVs. Fitch has taken the following rating actions on AXL and AAM: AXL --IDR upgraded to 'BB' from 'BB-'. AAM --IDR upgraded to 'BB' from 'BB-'; --Secured revolving credit facility rating affirmed at 'BB+/RR1'; --Senior unsecured notes rating upgraded to 'BB/RR4' at 'BB-/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 Monica Aggarwal, CFA Managing Director +1-212-908-0282 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: alyssa.castelli@fitchratings.com. Summary of Financial Statement Adjustments - Summary of Financial Statement Adjustments: Fitch has made no material adjustments that are not disclosed within the company's public filings. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012566 Solicitation Status here Endorsement Policy here ail=31 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. 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 © 2016 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