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Fitch Affirms Tenneco's Secured Term Loan at 'BBB-/RR1'
May 15, 2017 / 3:13 PM / 6 months ago

Fitch Affirms Tenneco's Secured Term Loan at 'BBB-/RR1'

(The following statement was released by the rating agency) CHICAGO, May 15 (Fitch) Fitch Ratings has assigned a Long-Term Issuer Default Rating (IDR) of 'BB+' to Tenneco Automotive Operating Company (TAOC), the principal operating subsidiary of Tenneco Inc. (TEN). In addition, Fitch has affirmed the company's $400 million term loan A rating at 'BBB-/RR1'. The primary borrower on the term loan A has migrated to TAOC from TEN. A full list of ratings for TEN and TAOC is included at the end of this release. TEN has amended and extended its secured credit facility, which consists of a revolver and a term loan A. As part of the amendment, the company has changed the designated borrower for the term loan A to TAOC from TEN. However, TEN remains the primary borrower for the revolver, although TAOC and several other subsidiaries are co-borrowers on the revolver. Upstream and downstream guarantees between TEN and TAOC remove any structural subordination concerns. In addition to changing the designated borrower on the term loan A to TAOC from TEN, the amendment includes several other notable changes. The limit on the revolver has been raised to $1.6 billion from $1.4 billion and the term loan A has been increased to $400 million, up from $264 million outstanding at March 31, 2017. Maturity dates for both the revolver and the term loan A have been shifted to 2022 from 2019. In addition, the amendment includes adjustments to the pricing grid that could accelerate future price reductions. It also increases flexibility with respect to restricted payments, mandatory prepayments and other baskets. Covenant levels are unchanged, but the level of cash that can be included in the net leverage calculation has been increased. Although the upsized term loan A results in a relatively small increase in long-term gross leverage, the increase in the revolver provides the company with incremental liquidity. The increased potential for future lower pricing and various other modifications will help to increase the company's financial flexibility over the intermediate term. The Recovery Ratings of 'RR1' on the secured revolver and term loan A reflect their substantial collateral coverage and outstanding recovery prospects in the 90%-100% range in a distressed scenario. The one-notch uplift from the IDRs of TEN and TAOC reflects Fitch's criteria for notching when an issuer has an IDR in the 'BB' range. KEY RATING DRIVERS The ratings of TEN and TAOC are supported by the company's market position as a top global supplier of emission control and vehicle suspension components, with a strong presence in both the original equipment and aftermarket segments. Fitch expects demand for TEN's Clean Air products to remain strong over the intermediate term as global emissions requirements for light vehicles continue to tighten. In addition, more restrictive global regulations governing commercial truck and off-highway vehicle emissions are leading to enhanced growth opportunities and higher profitability, as the larger engines in these vehicles require more emissions-related content. New technologies in the company's Ride Performance division, including increased production of electronic suspension systems, will also contribute to revenue and profitability growth, although Fitch expects emissions control products will be a larger contributor to TEN's sales growth over the intermediate term. Fitch expects intermediate-term growth in profitability and FCF will provide the company with solid financial flexibility. Rating concerns include industry cyclicality, volatile raw material costs, and variability in fuel prices. Cyclical risk is mitigated somewhat by the increasing diversification of the company's book of business and its improving cost structure, as well as ever-tightening global emissions regulations, which will drive growth in the market for emission control products independent of global economic conditions. Also mitigating risk and supporting near-term liquidity is a lack of material debt maturities until 2022, following the amendment of the credit facility. Volatile fuel prices present a risk because the company's content on smaller and more fuel efficient vehicles tends to be less profitable. As with other auto suppliers, TEN seeks to minimize the effect of volatility in raw material prices by passing along a substantial portion of the change in its material costs to its original equipment customers. In addition, reflecting the strengthening of its balance sheet in recent years, the company has indicated the potential for opportunities that would enhance its business through acquisitions, which could run the risk of at least a temporary increase in leverage. Another concern is the potential for an adverse outcome in the ongoing antitrust investigation of TEN, primarily being conducted in Europe and the U.S. However, the European Commission's (EC) recent closing of the case without penalty and the U.S. Department of Justice's (DOJ) previous grant of conditional leniency through the Antitrust Division's Corporate Leniency Policy are both encouraging. The Leniency Policy limits TEN's exposure as long as the company self-reports matters to the DOJ and continues to cooperate with the DOJ's investigation. Despite these positive developments, a number of other parties continue their investigations, with the continued potential for an adverse outcome. As of Dec. 31, 2016, the principal of TEN's debt totaled $1.6 billion, including off-balance-sheet securitizations. Last 12-months (LTM) Fitch-calculated EBITDA was $704 million after payment of minority dividends, leading to Fitch-calculated gross EBITDA leverage of 2.2x. FFO adjusted leverage was 2.9x, and FFO fixed charge coverage was 5.1x. TEN's EBITDA margin, calculated before payment of minority dividends, was 8.8%, or 11.6% on a value-added basis that excludes the effect of pass-through substrate sales. Fitch-calculated free cash flow (FCF) in the year ended Dec. 31, 2016 was $135 million, leading to a FCF margin of 1.6% or 2.1% on a value-added basis. Liquidity totaled $1.1 billion, including $347 million in cash and cash equivalents and $740 million in availability on the company's secured revolver. KEY ASSUMPTIONS --In 2017 and beyond, U.S. industry sales remain at around 17 million units, while global sales continue to rise modestly in the low-single-digit range; --Debt, including off-balance-sheet securitizations, remains steady around $1.5 billion over the next several years; --Capital spending runs at about 3.5% of revenue; --The company keeps between $250 million and $300 million in consolidated cash on hand, with any excess cash used for acquisitions or share repurchases; --The company completes its $400 million share repurchase program over the next three years. RATING SENSITIVITIES Positive: Further developments that may, individually or collectively, lead to a positive rating action include: --An increase in TEN's value-added free cash flow margin to about 3% on a consistent basis; --A decline in FFO adjusted leverage to 2.5x or lower; --An increase in FFO fixed charge coverage to 5x or higher. Negative: Further developments that may, individually or collectively, lead to a negative rating action include: --A severe decline in global vehicle production that leads to reduced demand for TEN's products; --A decline in TEN's value-added free cash flow margin to below 1% for an extended period; --An increase in FFO adjusted leverage to 4x or higher; --A decline in FFO fixed charge coverage to 3x or lower; --An adverse outcome from the antitrust investigation that leads to a significant decline in liquidity or an increase in leverage. Fitch has taken the following rating actions: TAOC --Long-Term IDR assigned at 'BB+'; Outlook Stable --Secured Term Loan A rating affirmed at 'BBB-/RR1'. In addition, Fitch also has the following existing ratings on TEN: TEN --Long-Term IDR 'BB+'; --Secured revolving credit facility rating 'BBB-/RR1'; --Senior unsecured notes rating 'BB+/RR4'. The Rating Outlook is Stable. Primary Analyst Stephen Brown Senior Director +1-312-368-3139 Fitch Ratings Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Eric C. Ause Senior Director +1-312-606-2302 Committee Chairperson Shalini Mahajan, CFA Managing Director +1-212-908-0351 Media Relations: Alyssa Castelli, New York, Tel: +1 (212) 908 0540, Email: Summary of Financial Statement Adjustments - Fitch has adjusted TEN's debt to include off-balance-sheet factored receivables. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 10 Mar 2017) here Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 21 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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