S&P Places TTM Technologies (TTMI) on CreditWatch Negative Following Move to Acquire Viasystems (VIAS) Sep 22, 2014 04:55PM

Standard & Poor's Ratings Services said it placed its 'BB' corporate credit rating on Costa Mesa, Calif.-based TTM Technologies Inc. (Nasdaq: TTMI), and our issue-level ratings on its senior unsecured convertible notes and its shelf program, on CreditWatch with negative implications.

"The CreditWatch listing follows TTM's announcement on Sept. 22, 2014 that it will acquire Viasystems' (Nasdaq: VIAS) common equity for cash and stock valued at almost $370 million," said Standard & Poor's credit analyst Christian Frank.

TTM intends to issue a $1.3 billion credit facility to fund the cash portion of the equity purchase, refinance debt at both companies (including Viasystems' $600 million senior secured notes, we believe), and provide liquidity for general corporate purposes. Pro forma for the acquisition, we estimate that leverage would increase to the mid-4x area based on reported results through June 30, 2014, up from actual leverage of 3.3x. The transaction will require regulatory approvals in the U.S., including approvals related to the company's defense end market, and in China.

We believe that the acquisition, which would roughly double TTM's scale, would improve the company's diversity with the addition of customers in the automotive end market and the dilution of Apple as a percentage of total revenues, and it would allow for some cost reductions and efficiencies in capital spending. The combined company's global PCB market share would be roughly 5%, making it the second leading provider; however, the industry remains highly fragmented, competitive, and cyclical, and the company would continue to face wage inflation in China.

We will monitor developments related to the proposed acquisition, including required regulatory approvals, and resolve the CreditWatch listing when more information regarding the transaction and financing becomes available. We could lower the rating by one or two notches if TTM completes the transaction and finances it as we expect. If TTM does not complete the acquisition, we will review our expectations for operating performance and its financial risk profile before resolving the CreditWatch.

S&P Raises Outlook on Cardinal Health (CAH) to Stable Following FY14 Outperformance Sep 22, 2014 04:23PM

Standard & Poor's Ratings Services revised its outlook on Dublin, Ohio-based Cardinal Health (NYSE: CAH) to stable from negative and affirmed the 'A-' corporate credit rating. We also affirmed the 'A-2' commercial paper rating.

The rating affirmation and outlook revision follows a fiscal 2014 performance that exceeded our expectations. In particular, the revenue decline of almost 10% was better than the 15% decline we forecasted, which contributed to higher levels of EBITDA, free cash flow, and on-hand cash. The better than expected performance, and corresponding strong credit metrics, reinforces our perception of business risk and conservative financial policies after two major contract losses (Express Scripts in 2012 and Walgreens in 2013).

"Cardinal Health remains one of the three largest drug distributors," said credit analyst Michael Berrian. "The company has size and scale, and its market position is strong, evidenced by the recent extension of the CVS contract to 2019, in conjunction with the generic sourcing joint venture that began on July 8, 2014. We continue to assess Cardinal Health's business risk profile as "satisfactory"."

The stable outlook reflects our expectation that Cardinal will grow revenues at a low single-digit rate, in line with the industry, and continue to generate strong cash flow. Although we do not expect any debt repayments, we do expect leverage will stay at 1x or less given modest EBITDA growth.

Downside scenario

We could lower the rating if incremental debt, or the use of on-hand cash, totaling roughly $1.5 billion, to fund an acquisition or share repurchase results in leverage increasing to more than 1.5x. We could also lower the rating in the more unlikely event the company is unable to sustain modestly higher margins resulting in leverage also increasing to, and being sustained at, more than 1.5x over the next two years. This could occur if gross margins decline to 5.5% or less and would result from price pressure in the pharmaceutical distribution business or lower revenues in the higher margin medical products supply business.

Upside scenario

Given the concentration in pharmaceutical distribution, an upgrade is unlikely, barring a major diversifying acquisition that improves its satisfactory business risk profile while keeping leverage at 2x or less.

Fitch Lifts Outlook on Southwest Airlines (LUV) to Positive; Affirms 'BBB' Rating Sep 22, 2014 02:53PM

Fitch Ratings has affirmed the ratings for Southwest Airlines (NYSE: LUV) at 'BBB'. The Rating Outlook is revised to Positive from Stable. A full rating list is shown below.

Southwest's investment grade ratings are supported by the company's strong competitive position in the U.S. domestic market, solid free cash flow (FCF), declining leverage, and substantial financial flexibility. While credit metrics in recent years were weak for the 'BBB' rating due to negative impacts from the financial crisis and the AirTran acquisition, improvements over the past year now put Southwest's credit metrics solidly in line with the 'BBB' rating.

The Positive Outlook reflects Fitch's view that a positive rating action could be warranted over the intermediate term should the company continue to strengthen operating margins, control unit cost inflation, generate solid FCF, and exhibit stable or declining leverage. Fitch also notes that operating risks relating to the integration of AirTran are now largely in the past as Southwest expects to effectively complete the integration process by year-end 2014.

Rating concerns: Primary rating concerns include industry risks that are typical for any airline, including fuel prices, event risk, and macroeconomic concerns. The industry remains highly leveraged to the overall macroeconomic environment. A future downturn could significantly affect demand for air travel, resulting in lower yields and load factors. Southwest may also face continued pressure from rising labor costs. Most of Southwest's major union contracts are open for amendment, and the ultimate cost impact from those negotiations is uncertain at this time. Concerns also include increased competition both from Southwest's large network rivals that are now financially healthier than they have been in the past, and from rapidly growing low-cost carriers.

Key Rating Drivers

Solid Domestic Operating Environment: Despite moderate macroeconomic growth, demand trends in the North American airline industry remain positive. Fitch expects continued capacity discipline from the large domestic carriers combined with a stable economic environment to continue to foster high load factors and growing yields. Southwest's route structure has proven to be a significant advantage relative to its peers in 2013 and 2014 due to its domestic focus, as the U.S. domestic market has proven to be one of the strongest aviation markets in the world over that time frame.

Improving Financial Performance: Southwest has shown solid unit revenue performance through the first half of 2014 with PRASM increasing by 6.4%, outpacing all of its larger network rivals. Unit costs are increasing modestly, primarily due to higher salaries and wages, but costs are rising slower than unit revenues, leading to higher operating margins. Fitch calculates Southwest's EBITDAR margin for the LTM period ended June 30, 2014 at 20.7%, up from 18.2% for fiscal 2013. Further margin expansion is expected going forward following the completed integration of AirTran, the continued retirement of Southwest's 737 classics, and the growing portion of the fleet represented by the larger 737-800.

Unit costs were largely held in check through the first part of the year, with higher wages being offset by lower fuel and maintenance. Southwest continues to face pressure from rising labor costs, an issue that has been present for the past several years. Most of Southwest's major union contracts are currently open for amendment and the company is actively negotiating with its labor groups. Southwest's relationships with its unions have generally been healthy, but the possibility exists that any new contracts that the unions ratify could further pressure wages. While total salaries/wages were up by 8% in the first six months of the year, roughly half of that increase was due to higher profit sharing.

Improving financial performance can be seen in Southwest's pre-tax return on invested capital (ROIC) metric. The company has a long-standing goal of hitting a minimum pre-tax ROIC of 15% (excluding special items), which they had fallen short of for the past few years. In the LTM period ended June 30, 2014 pre-tax ROIC reached 17.1%. The company expects full-year 2014 ROIC to exceed 15%, which Fitch considers achievable.

AirTran Integration Largely Complete: Southwest expects the integration of AirTran to be effectively complete by the end of 2014. Fitch previously considered the operational risks involved with a complex integration process as well as inefficiencies inherent in operating with two different brands and a subfleet of 717s to be rating concerns. With the integration process now largely complete those concerns are in the past. The AirTran integration is living up to expectations previously communicated by Southwest, with expected synergies expected to reach $400 million in 2014. Cumulative merger and integration costs will total approximately $550 million, of which $466 million has been incurred through the first half of 2014.

Solid Free Cash Flows: Southwest's ability to consistently generate significant FCF is one of the factors that sets the company apart from its industry peers. FCF has been positive each year since 2008 when the industry was going through the worst of the recession. Fitch expects Southwest to continue to generate steadily positive FCF for the intermediate term despite relatively high capital expenditures, particularly in 2014 and 2016-2017 when aircraft deliveries will be heavy, and despite Fitch's expectation that dividend payments will continue increase. Fitch expects FCF generation in 2014 to be consistent with 2013 at $900 million to $1 billion. FCF is also expected to be solid in 2015 owing to Southwest's strong operating margins and lower expected aircraft deliveries.

Increased Shareholder-Friendly Cash Deployment: Southwest announced in May that it would increase its dividend from $0.04/share to $0.06/share, equivalent to an annual payout of roughly $168 million. This increase follows last year's announced increase from $0.01/share to $0.04/share. Share repurchases have also accelerated in recent years. Following the completion of its $1.5 billion share buyback program, Southwest announced a new $1 billion program, including two accelerated share repurchase programs of $200 million each. Fitch expects that Southwest could fulfil the $1 billion program by the end of 2015.

Increased cash outflows could be a concern particularly in light of the relatively heavy capital spending that will be required in the coming years. However, Fitch expects Southwest to manage its dividends and buybacks prudently, prioritizing a healthy balance sheet over increased returns to shareholders. Concerns are also mitigated by the company's history of producing strong FCF.

Compelling Growth Opportunities: Fitch expects the impending repeal of the Wright Amendment, recently acquired slots at Washington Reagan and New York LaGuardia, and new opportunities to expand internationally to provide solid opportunities for Southwest to grow in the coming years. Washington D.C., New York, and Dallas each represent attractive aviation markets, and Southwest's increased flying out of those markets is likely to be accretive to operating margins.

Improving Balance Sheet: Fitch calculates Southwest's total adjusted debt/EBITDAR at 2.8x as of June 30, 2014, which is down by a full turn from a year ago. Aircraft adjusted debt (i.e. debt adjusted only for aircraft rent rather than total rent) is lower at roughly 1.7x, while funds from operations (FFO) adjusted leverage stands at 3.4x. Fitch expects leverage to continue to decline incrementally over the next several years, as the completion of the Airtran integration and the delivery of new fuel efficient aircraft present opportunities for margin growth, and because of the potential for incremental debt reduction. Leverage has improved over the past year partly due to lower debt; Southwest has paid down $175 million in debt since June 30, 2013, and intends to pay down more in the second half of 2014, and partly due to Southwest's rising operating margins.

Healthy Financial Flexibility: Southwest's investment grade ratings are supported by the company's sizeable financial flexibility. As of the end of the second quarter, Southwest maintained a cash balance of $4 billion, augmented by a $1 billion revolver. Total liquidity, including revolver capacity, totalled 27.5% of LTM revenue, which is above average for the industry. Southwest also maintains a sizeable pool of unencumbered assets which should support its access to the capital markets even in a future recession. Fitch expects Southwest to generate sufficient cash flow over the next several years to continue to fund its aircraft deliveries without accessing the debt markets, adding to its existing pool of high-quality, unencumbered assets.


A positive rating could be triggered by sustained EBITDAR margins above 20%, solid FCF generation particularly in light of heavy expected future capital expenditures, and total adjusted debt/EBITDAR approaching 2.5x on a sustained basis. Fitch would also look for clarification around Southwest's currently open labor contracts in respect to their longer-term cost implications.

Fitch does not expect to take a negative rating action in the near-term. However, a negative action could be driven by an exogenous shock that causes demand for air travel to drop significantly or a fuel shock that is not offset by rising yields. A negative action could also be driven by a change in management strategy favoring shareholder returns at the expense of a healthy balance sheet.

Fitch affirms Southwest's ratings as follows:

--Issuer Default Rating (IDR) at 'BBB';
--Senior unsecured debt at 'BBB';
--$1 billion unsecured revolving credit facility expiring 2018 at 'BBB';
--Secured term loans due 2019 and 2020 at 'BBB+'.

S&P Raises L-T/S-T Ratings on Volkswagen AG (VLKAY) to 'A/A-1' Sep 22, 2014 02:08PM

Standard & Poor's Ratings Services said today that it raised to 'A/A-1' from 'A-/A-2' its long- and short-term corporate credit ratings on Germany-based auto manufacturer Volkswagen AG (OTCBB: VLKAY) (VW). The outlook is stable. We also raised our long- and short-term ratings on the company's debt to 'A' and 'A-1' from 'A-' and 'A-2'.

In addition, we raised to 'A/A-1' from 'A-/A-2' the long- and short-term ratings on Volkswagen's "core" subsidiaries, captive finance entity Volkswagen Financial Services AG (VW FS) and its subsidiary Volkswagen Bank GmbH. We also raised to 'A' from 'A-' the long-term rating on finance subsidiary Volkswagen Group Services SA and the long-term issuer credit and financial strength ratings on captive insurer Volkswagen Insurance Co. Ltd.

The outlook on all these entities is stable. We regard these entities as "core" under our group rating methodology, and as such the ratings and outlook are at the same level as the parent Volkswagen AG.

The upgrade reflects our expectation that VW's leverage metrics will steadily strengthen during 2015 and 2016, supported by gradual profitability improvements and positive free operating cash flow (FOCF) in the auto division. We anticipate that metrics will be resilient to continued challenging macroeconomic conditions in certain regions, competitive end-markets, and VW's significant capital expenditures (capex). We do not expect the company to make further material debt-financed acquisitions.

The VW group has leading market positions in passenger cars and trucks, with broad product and geographic diversity in Europe, the Americas, and Asia. The group has well-known brands covering volume, premium, and luxury segments. In addition, we expect the company's spending on modernizing and extending its product range to support the business over the next few years. These strengths are partly offset by the group's significant exposure to generally cyclical demand, high capital intensity, and price competition in end-markets. This includes the low-margin, mass-market volume segment, which accounts for a significant portion of VW's vehicle sales. Our business risk profile assessment remains "strong."

For 2014 and 2015, we forecast that auto demand in Europe and Asia-Pacific–-VW's most important regions for volume sales--will continue to grow. We recognize that there are some risks, such as the ongoing quite weak macroeconomic conditions in Europe and Latin America, and the impact of political risks on car demand in Russia. Chinese authorities are conducting an investigation into pricing in the auto sector, but we assume that this will not affect VW in a meaningful way.

The group's leverage is moderate, supported by significant operating cash flow in its auto division. We anticipate that this will fund the group's large capex, which is planned at about €84 billion during 2014-2018 (excluding Chinese joint ventures). VW has considerable liquidity resources and a financial policy that maintains a balanced funding mix, in our view. We continue to assess VW's financial risk profile as "modest."

For 2014, we forecast that the auto operations will continue to generate positive FOCF, supported by gradual improvements in profitability. Coupled with an absence of material debt-financed acquisitions, we forecast that leverage will steadily strengthen.

Under our criteria, a combination of "strong" business risk and "modest" financial risk profiles results in an anchor of 'a+' or 'a'. We use the lower anchor of 'a' for VW, reflecting the constraints to VW's business risk profile from the significant portion of vehicle sales it derives from the volume segment. We no longer apply a one-notch downward adjustment for our comparable ratings analysis, as we now consider that VW's leverage metrics will be toward the middle of the range for a "modest" financial risk profile over the next two years.

Moody's Lowers Outlook on CGG S.A. (CGG) to Negative; Notes Continued Soft Market Conditions Sep 22, 2014 02:05PM

Moody's Investors Service has today changed to negative from stable the outlook of CGG S.A. (NYSE: CGG) and its subsidiaries. Concurrently, the Ba3 corporate family rating (CFR) and all other ratings of the group have been affirmed.


Due to ongoing soft market conditions, CGG reported weaker-than-expected operating performance for the first half of the year. A focus on returns and cash flow growth by the oil majors has led to cautious seismic spending since the end of the second quarter of 2013 leading to lower pricing. Whilst the long term outlook for the seismic industry remains positive based on the likely continuation of exploration activity into deeper waters, Moody's expects the current challenging backdrop to persist for a longer period of time than initially anticipated and that as a result the group's high leverage may not reduce to a level more commensurate with its current ratings over the next 12 to 18 months.

CGG's leverage, as measured by adjusted debt to EBITDA minus multi-client amortization, stood at 6.1x for the LTM ending June 2014 compared to 4.7x at year-end 2013. Moody's previously stated that a downgrade of the CFR could occur in the event of continuing deterioration in operating performance resulting in leverage sustainably above 4.5x.

More positively, the ratings also reflect (i) the group's position as leader in seismic equipment and among the two largest players in marine seismic services worldwide; (ii) its geographic diversification; and (iii) its good liquidity position.

Additionally, Moody's views the capacity reduction in the industry led by CGG and its main peers as positive but also believes that it only reflects a stronger-than-expected deterioration in market conditions compared to at the start of the year.


A downgrade of the CFR could occur in the event of limited improvement in operating performance, resulting in Moody's expectation that leverage will fail to fall towards 4.5x over the next 12 to 18 months and/or weakening liquidity position. Moody's could also consider downgrading the ratings in event of any material acquisitions or change in financial policy.


Given the negative outlook, positive pressures are unlikely in the near term but could arise in the event of material improvements in profitability translating into leverage falling towards 3x on a sustained basis. Any potential upgrade would also include an assessment of market conditions and the company's success in achieving its portfolio rebalancing.


The principal methodology used in these ratings was Global Oilfield Services Rating Methodology published in December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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