September 20, 2017 / 2:50 PM / a year ago

Fitch Affirms GKN Holdings at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) WARSAW/PARIS, September 20 (Fitch) Fitch Ratings has affirmed UK-based GKN Holdings plc's (GKN) Long-Term Issuer Default Rating (IDR) and long-term senior unsecured rating at 'BBB-' and Short-Term IDR at 'F3'. The Outlook on the Long-Term IDR is Stable. The affirmation reflects GKN's recent financial performance being broadly in line with our expectations, no material changes to the company's business profile, and expected key financial ratios remaining within the parameters of the 'BBB-' rating over the medium term. KEY RATING DRIVERS Debt Increase No Rating Impact: Fitch views the GBP300 million bond issue carried out in 2Q17, proceeds of which are expected to be used to top up the company's UK pension plans, as broadly neutral to GKN's ratings. The increase in debt has only a slightly negative effect on net leverage, although end-2017 funds from operations (FFO) adjusted net leverage is still expected to be comfortably within the downgrade guideline of 2.0x. The impact of the debt increase is offset by the heightened visibility of stable cash outlays related to pension plans over the medium term. Stable Cash Generation: GKN's financial results for the past two years have been stable and broadly commensurate with a 'BBB-' rating. Its FFO margin was stable at 9.5% for the last 12 months (LTM) to 30 June 2017, compared with 9% in 2016, despite some restructuring measures and product mix changes in the aerospace division negatively affecting cash flows. Fitch expects the FFO margin to remain between 9% and 10% in the short- to medium-term. FCF Margin within Guidelines: Fitch expects GKN's EBIT margin to remain, stable. For the LTM to 30 June 2017, it was at 6.9%, compared with 6.8% in 2016. GKN's free cash flow (FCF) margin is expected to remain between 0% and 1% over the coming years, within the guidelines of less than 0% for a downgrade and 2% for an upgrade. Leading Market Positions: GKN is the world's leading manufacturer by sales of driveline systems and sintered metals for precision components. It also has strong positions in aerospace equipment manufacturing, which has been strengthened by the Fokker Technologies acquisition in 2015. Fitch views GKN's continuing diversification into aerospace as credit-positive as it is more stable and higher-margin than auto supply. M&A Neutral to Ratings: Recent M&A activity has not adversely affected the ratings and we do not believe that any future acquisitions will either. We believe that any large future M&A activity is likely to include an equity issue in order not to strain the capital structure. GKN has spent approximately GBP1.5 billion on four acquisitions since 2011, the most recent of which was the GBP450 million purchase of Fokker Technologies Group BV in 4Q15. Previous acquisitions at GKN have usually been followed by a period of integration and consolidation. While we do not expect any significant M&A activity in the short term, further mid-scale acquisitions cannot be ruled out. DERIVATION SUMMARY GKN Holdings' 'BBB-' rating is adequately positioned compared with peers in the auto and aerospace supply sectors. A well-diversified business profile, coupled with a capital structure and liquidity position which we view as strong relative to peers such as Metalsa, S.A. de C.V. (BBB-/Stable) and MTU Aero Engines AG (BBB-/Stable), is slightly offset by average earnings margins and weaker FCF generation than peers such as Delphi Automotive PLC (BBB/Stable). No country-ceiling, parent/subsidiary or operating environment aspects impact the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: -Low single-digit organic revenue growth; -Product mix and cost structure improvements largely offsetting pricing pressure leading to flat earnings margins; -Aggregate working capital outflow of GBP450 million over 2017-2020 -Capex at around 6% of revenue -No large scale M&A, which is treated as event risk if it materialises RATING SENSITIVITIES Future developments that may, individually or collectively, lead to positive rating action -A minimum FCF of 2% of revenue (2016: 0%; 2017E: 0.1%) on a sustained basis. -FFO adjusted net leverage below 1.5x (2016: 1.4x; 2017E: 1.7x) on a sustained basis. -EBIT margin above 9% (2016: 6.8%; 2017E: 7%) on a sustained basis. Future developments that may, individually or collectively, lead to negative rating action -FFO adjusted net leverage increases above 2.0x on a sustained basis. -Negative FCF on a sustained basis. -EBIT margin below 7% on a sustained basis. -Large debt-funded acquisitions or aggressive shareholder returns weakening the company's financial flexibility. LIQUIDITY In addition to its reported GBP654 million of cash and short-term deposits at end-1H17 (which includes the proceeds of the GBP300 million bond issue), GKN has a committed long-term revolver of GBP800 million maturing in 2019. Expected positive FCF generation will allow the company to maintain stable leverage levels, which are already strong for the ratings. GKN has limited debt maturities over the next two years, and maintains ready access to the capital markets, as demonstrated by the recent GBP300 million issue. For the purpose of liquidity analysis, Fitch assumes that GBP73 million of end-2016 reported cash is not readily available for debt repayment. Fitch assumes that GBP60 million is needed for day-to-day operational requirements, on top of the GBP13 million held by the group's captive insurance company. Contact: Principal Analyst Aurelien Jacquot Associate Director +33 1 4429 9137 Supervisory Analyst Tom Chruszcz Director +48 22 338 6294 Fitch Polska SA Krolewska 16 Warsaw 00 - 103 Committee Chairperson Emmanuel Bulle Senior Director +34 93 323 8411 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Summary of Financial Statement Adjustments -Operating lease liability is calculated by multiplying by 8x the annual operating lease expense. -Amortisation of non-operating intangible assets arising on business combinations is viewed as an operating item by Fitch. -Reported cash is adjusted by GBP60 million, which is deemed as non-available as it is necessary for intra-year working capital needs and by GBP13 million held at GKN's captive insurance company. 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