Delphi Automotive's (DLPH) IDRs Affirmed by Fitch; Commentary Offered

Fitch Ratings has affirmed the Long-Term Issuer Default Ratings (IDRs) of Delphi Automotive PLC (NYSE: DLPH) and its Delphi Corporation (Delphi) subsidiary at 'BBB'. Fitch has also affirmed DLPH's senior unsecured notes rating at 'BBB', as well as Delphi's unsecured term loan, unsecured revolving credit facility, and senior unsecured notes ratings at 'BBB'. A full list of the ratings is included at the end of this release. Fitch's ratings apply to a $400 million unsecured term loan A, a $1.5 billion unsecured revolving credit facility and $3.6 billion in senior unsecured notes. The Rating Outlooks for DLPH and Delphi are Stable.

KEY RATING DRIVERS

The ratings of DLPH and its Delphi subsidiary reflect the company's relatively strong credit profile, as it continues to leverage its market position in advanced automotive technologies and its low cost base to drive margins and free cash flow (FCF) that are high for the auto supply industry. The company's focus on electrical architecture, safety, and advanced powertrain technologies has put it at the forefront of important growth trends in the global auto industry. Fitch expects DLPH's strong business position in these growth technologies will continue to result in top line growth exceeding the rate of underlying global vehicle production over the intermediate term. Although the company is highly acquisitive and deploys a substantial amount of its cash toward shareholder-friendly activities, it also maintains relatively conservative financial practices, including a long-term leverage target of only 1.5x. Additional rating drivers include the company's relatively strong liquidity position, minor pension obligations, and a manageable debt maturity profile, all of which continue to provide it with significant financial flexibility.

Rating concerns continue to include the cyclical nature of the global auto industry, intense industry competition, potentially volatile raw material costs, and new entrants into the automotive technology sector. Mitigating these concerns are the diversification of DLPH's business across geographies, customers and products, as well as its flexible operating model, which has positioned much of the company's manufacturing capacity in low-cost countries. DLPH's strong supply position with most major global auto manufacturers is also a mitigant. Other concerns include the company's penchant for acquisitions and its significant cash returns to shareholders, although its relatively strong FCF generating capability suggests that most of these activities will not drive a meaningful increase in long-term leverage. With its above-average financial flexibility, Fitch also expects DLPH would be able to perform better than most auto suppliers through an industry downturn.

Fitch expects leverage to remain near DLPH's 1.5x leverage target over the longer term, but it could temporarily rise at times when the company makes acquisitions, as it did with the 2015 acquisition of HellermanTyton Group PLC (HTY). Nonetheless, Fitch expects strong operating cash flow will generally provide the company with sufficient flexibility to fund capital spending, dividends, share repurchases and smaller acquisitions without the need for significant incremental long-term borrowing. EBITDA leverage (debt/Fitch-calculated EBITDA) at March 31, 2016, was 1.8x, with $4.5 billion in debt (including Fitch's estimate of off-balance sheet factored receivables) and last 12 months (LTM) EBITDA of $2.6 billion. Funds from operations (FFO) adjusted leverage was 2.5x at March 31, 2016. EBITDA leverage was above the company's 1.5x target as a result of the HTY acquisition, which closed in December 2015, as well as some temporary seasonal borrowing. Fitch expects leverage to decline to the company's target level by year-end 2016, once a full 12 months of HTY EBITDA has been recorded and as seasonal borrowing is reduced.

Fitch expects the company's liquidity position to remain relatively strong over the intermediate term. At March 31, 2016, liquidity included $463 million in unrestricted cash and cash equivalents and nearly full availability on its $1.5 billion unsecured revolver. Short-term debt and current maturities amounted $368 million, including $315 million of on-balance sheet accounts receivable factoring. The factoring-related debt was largely due to timing, as there were no on-balance sheet factored receivables at year-end 2015. The company has no significant long-term debt maturities until 2018, when the remaining $400 million of Delphi's term loan A matures.

Fitch expects DLPH to produce relatively strong FCF over the intermediate term, with post-dividend FCF margins running in the mid-single digit range. Fitch expects FCF to remain strong despite an expected rise in capital spending to support higher business levels and new products. Share repurchases are likely offset much of the effect of any increase in the dividend rate on overall dividend spending. FCF after dividends in the LTM ended March 31, 2016 (adjusted for the effect of off-balance sheet factoring) was strong at $682 million, equal to a 4.4% FCF margin. In 2016, Fitch expects FCF to grow as the company benefits from higher business levels, as well as higher FCF from the HTY acquisition. Although the company has guided to capital spending of $800 million in 2016, a 14% increase over the 2015 level, Fitch expects increased operating cash flow to result in higher FCF overall.

Fitch expects DLPH to maintain around $500 million to $600 million in cash on its balance sheet over the intermediate term. Fitch views DLPH capital allocation strategy, which prioritizes investment over share repurchases, as disciplined and relatively conservative. Fitch expects the company will generally pull back on share repurchase activity when it needs to conserve liquidity.

In the LTM ended March 31, 2016, DLPH spent about $1.7 billion on acquisitions (net of cash acquired) and bought back about $1.3 billion of its common stock. The majority of the acquisition spending was related to the HTY acquisition. DLPH funded the acquisitions primarily with cash on hand, including proceeds from the divestiture of its Thermal Systems business, and the issuance of $1.3 billion in senior unsecured notes in November 2015. Fitch expects DLPH will generally consider cash deployment as a trade-off between acquisitions and share repurchases, with higher repurchase activity when acquisition spending is low. Fitch does not expect the company to issue long-term debt to fund share repurchases, although the timing of repurchases could, at times, drive some incremental temporary borrowing.

Similar to many other large U.S. auto suppliers, most of DLPH's debt has been issued in the U.S., while 63% of the company's revenue is derived outside the U.S. Although this has created a mismatch between the source of the company's cash and its debt obligations, Fitch believes that DLPH has sufficient financial flexibility to meet its U.S. dollar-denominated debt obligations when they come due. Notably, because DLPH is a U.K. resident taxpayer organized under the laws of Jersey, the tax consequences of transferring cash into the U.S. to service its obligations are lower than for U.S.-resident companies. In addition, to help diversify its capital structure, DLPH issued EUR700 million in senior unsecured notes in March 2015, which the company designated as a hedge against a portion of its foreign currency exposure.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for DLPH include:

--Low-single-digit global auto production growth over the intermediate term;
--DLPH's penetration rates increase, resulting in revenue rising at a faster rate than overall vehicle production;
--Capital spending runs at about 5% of revenue over the intermediate term;
--The common stock dividend rate rises over time, but total cash spent on dividends is about flat on a reduced share count;
--The company continues to make modest to moderately sized acquisitions from time to time;
--The company refinances its significant debt maturities over the intermediate term;
--The company maintains around $500 million to $600 million in cash on its balance sheet, with excess cash used for acquisitions or share repurchases.

RATING SENSITIVITIES

Positive: Given DLPH's capital allocation strategy and leverage targets, Fitch does not anticipate an upgrade to DLPH's ratings in the intermediate term.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--An unexpected sharp decline in global auto production;
--A decline in the company's EBITDA margins to below 12%;
--A decline in the company's free cash flow margin to 3% or lower for a prolonged period;
--An increase in EBITDA leverage to above 1.5x for an extended period.

Fitch has affirmed the following:

DLPH
--Long-Term IDR at 'BBB';
--Senior unsecured notes rating at 'BBB'.

Delphi
--Long-Term IDR at 'BBB';
--Unsecured term loan rating at 'BBB';
--Unsecured revolving credit facility rating at 'BBB';
--Senior unsecured notes rating at 'BBB'.

The Rating Outlook is Stable.

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