S&P Assigns 'B' Rating to Federal-Mogul (FDML); Outlook Negative
Tweet
Share
E-mailGet Alerts FDML Hot Sheet
Join SI Premium – FREE
Standard & Poor's Ratings Services today assigned Southfield, Mich.-based U.S. automotive supplier Federal-Mogul Holdings Corp. (Nasdaq: FDML) a 'B' corporate credit rating. The rating outlook is negative.
At the same time, we assigned the company's proposed $500 million senior secured term loan B due 2018 and $2.1 billion senior secured term loan C due 2021 a 'B' issue-level rating, with a recovery rating of '4', indicating our expectation for average (30%-50%) recovery for lenders in the event of a payment default.
The company plans to use proceeds from the transaction to refinance its existing term loans issued by subsidiary Federal-Mogul Corp. (B/Negative/--). We plan to withdraw our corporate credit rating on Federal-Mogul Corp. and the issue-level ratings on the refinanced debt upon completion of the proposed transaction.
The 'B' corporate credit rating on Federal-Mogul reflects our assessment of the business risk profile as "weak" and its financial risk profile as "highly leveraged."
Federal-Mogul is a supplier of products and services to manufacturers and servicers of vehicles and equipment in the automotive, light-, medium-, and heavy-duty commercial and industrial markets. The company serves the light automotive vehicle (74%), heavy-duty truck (17%), and industrial (9%) markets. Its powertrain segment (57% of sales) sells technologies and components for powertrain applications and environments to original equipment (OE) manufacturers. The majority of sales in the company's vehicle components segment (43% of sales) are to aftermarket participants. We expect this mix to remain about the same. Aftermarket sales provide diversity to Federal-Mogul's revenue stream. However, although aftermarket sales have historically been more stable than OE sales, we believe recent experience has shown the aftermarket is under pressure from lower consumer spending during weak economic periods and a sharper focus on private-label products.
Our "weak" business risk assessment incorporates the multiple industry risks facing automotive suppliers, including volatile demand, high fixed costs, and severe pricing pressures. We believe the company's risk profile is tied to the performance of the global auto industry, which is contingent on a myriad of factors. These include general economic sentiment, consumer confidence, credit availability, and unemployment levels. We believe light-vehicle production in North America should rise 3.9% this year and 2.5% next, and that it could increase in Europe 1% in 2014 and 3.4% in 2015. Over time, in the company's powertrain segment, we believe the company could benefit from increasing content per engine, even as the number of cylinders per engine declines. In the company's aftermarket business, we believe Federal-Mogul could benefit over the long term as a result of increasing demand from the growing number of vehicles on the road globally and the higher average age of vehicles in North American and Europe.
Although we view commodity price fluctuations as a risk because of uncertainty of recovery from customers, the company has passed most of its incremental costs on to customers, albeit with a lag, through some contractual price escalations. We consider Federal-Mogul's customer base and end markets as diverse. No single customer accounts for more than about 6% of sales. The company maintains a No. 1 or No. 2 market share in most of its markets, which we believe indicates acceptable technological expertise and quality. The majority of the company's sales are in North America and Europe, with the remainder coming from the rest of the world.
Our "highly leveraged" financial risk profile assessment is supported by a ratio of debt to EBITDA as of Dec. 31, 2013, of 6.5x. In our opinion, improvements in EBITDA through 2014 could allow the company to decrease its leverage to about 6x. For the 12 months ended Dec. 31, 2013, free operating cash flow to total debt was weak at 2%. We expect free operating cash flow to remain positive in 2014, at about the same level as 2013.
At the same time, we assigned the company's proposed $500 million senior secured term loan B due 2018 and $2.1 billion senior secured term loan C due 2021 a 'B' issue-level rating, with a recovery rating of '4', indicating our expectation for average (30%-50%) recovery for lenders in the event of a payment default.
The company plans to use proceeds from the transaction to refinance its existing term loans issued by subsidiary Federal-Mogul Corp. (B/Negative/--). We plan to withdraw our corporate credit rating on Federal-Mogul Corp. and the issue-level ratings on the refinanced debt upon completion of the proposed transaction.
The 'B' corporate credit rating on Federal-Mogul reflects our assessment of the business risk profile as "weak" and its financial risk profile as "highly leveraged."
Federal-Mogul is a supplier of products and services to manufacturers and servicers of vehicles and equipment in the automotive, light-, medium-, and heavy-duty commercial and industrial markets. The company serves the light automotive vehicle (74%), heavy-duty truck (17%), and industrial (9%) markets. Its powertrain segment (57% of sales) sells technologies and components for powertrain applications and environments to original equipment (OE) manufacturers. The majority of sales in the company's vehicle components segment (43% of sales) are to aftermarket participants. We expect this mix to remain about the same. Aftermarket sales provide diversity to Federal-Mogul's revenue stream. However, although aftermarket sales have historically been more stable than OE sales, we believe recent experience has shown the aftermarket is under pressure from lower consumer spending during weak economic periods and a sharper focus on private-label products.
Our "weak" business risk assessment incorporates the multiple industry risks facing automotive suppliers, including volatile demand, high fixed costs, and severe pricing pressures. We believe the company's risk profile is tied to the performance of the global auto industry, which is contingent on a myriad of factors. These include general economic sentiment, consumer confidence, credit availability, and unemployment levels. We believe light-vehicle production in North America should rise 3.9% this year and 2.5% next, and that it could increase in Europe 1% in 2014 and 3.4% in 2015. Over time, in the company's powertrain segment, we believe the company could benefit from increasing content per engine, even as the number of cylinders per engine declines. In the company's aftermarket business, we believe Federal-Mogul could benefit over the long term as a result of increasing demand from the growing number of vehicles on the road globally and the higher average age of vehicles in North American and Europe.
Although we view commodity price fluctuations as a risk because of uncertainty of recovery from customers, the company has passed most of its incremental costs on to customers, albeit with a lag, through some contractual price escalations. We consider Federal-Mogul's customer base and end markets as diverse. No single customer accounts for more than about 6% of sales. The company maintains a No. 1 or No. 2 market share in most of its markets, which we believe indicates acceptable technological expertise and quality. The majority of the company's sales are in North America and Europe, with the remainder coming from the rest of the world.
Our "highly leveraged" financial risk profile assessment is supported by a ratio of debt to EBITDA as of Dec. 31, 2013, of 6.5x. In our opinion, improvements in EBITDA through 2014 could allow the company to decrease its leverage to about 6x. For the 12 months ended Dec. 31, 2013, free operating cash flow to total debt was weak at 2%. We expect free operating cash flow to remain positive in 2014, at about the same level as 2013.
Serious News for Serious Traders! Try StreetInsider.com Premium Free!
You May Also Be Interested In
- GE Aerospace (GE) PT Raised to $180 at BofA Securities
- The post-earnings selloff has created a buying opportunity in this stock - Argus
- S&P Global US Manufacturing PMI (Apr P) 49.9 vs 52 Expected, Services 50.9 vs 52
Create E-mail Alert Related Categories
Credit RatingsRelated Entities
Standard & Poor'sSign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
