Fitch Rates Delphi Automotive’s Proposed Notes ‘BBB’
By Business Wire News
Fitch Ratings has assigned a rating of ‘BBB’ to Delphi Automotive PLC’s (DLPH) proposed $1.3billion issuance of senior unsecured notes due 2020 and 2026. The Issuer Default Rating (IDR) for DLPH is ‘BBB’ and the Rating Outlook is Stable.
DLPH will use proceeds from the proposed notes to fund a portion of the cash consideration payable in connection with its planned acquisition of HellermannTyton Group PLC (HTY) that it announced in July 2015. The company plans to use any remaining proceeds for general corporate purposes.
Consistent with DLPH’s issuance of Euro-denominated notes in February 2015, the proposed notes will be issued by DLPH but will be guaranteed by its subsidiaries that serve as obligors under Delphi Corporation’s (Delphi) existing notes and credit facility, essentially ranking the new notes pari passu with Delphi’s senior unsecured debt. The proposed notes also contain a provision that calls for their mandatory redemption in the event the HTY acquisition is not consummated by June 30, 2016 (unless the date is extended in a manner consistent with the notes’ indenture).
KEY RATING DRIVERS
In July 2015, Fitch affirmed all of the ratings of DLPH and Delphi following the HTY acquisition announcement. Overall, Fitch views the HTY acquisition positively, as it will further strengthen DLPH’s presence in the growing automotive electrical architecture arena, while HTY’s relatively strong margins will enhance DLPH’s overall profitability even before projected synergies are achieved. Fitch also views the transaction as relatively low risk, given DLPH’s existing experience with HTY and its products. Fitch does not expect the acquisition to raise any significant regulatory concerns. However, the increase in leverage following the issuance of the proposed notes, which Fitch contemplated in its ratings affirmation, will reduce some of the cushion in DLPH’s ratings in the event of an unexpected downturn.
Fitch’s concerns include the cyclical nature of the global auto industry, the industry’s intense competition and potentially volatile raw material costs. Mitigating these concerns is the diversification of DLPH’s business across geographies, customers and products, and its flexible operating model, which has positioned much of the company’s manufacturing capacity in low-cost countries. Other concerns include the company’s acquisitive nature and its significant cash returns to shareholders, although its strong cash position and FCF generation suggest that most of these activities will not drive a meaningful increase in leverage, at least not beyond its 1.5x target. Furthermore, due to its financial flexibility, Fitch expects DLPH would be able to perform better through an industry downturn than most auto suppliers.
Although the addition of long-term debt to the company’s existing $2.7 billion in debt outstanding will increase DLPH’s leverage, Fitch expects pro-forma leverage to only rise to the mid-1x range, which is consistent with DLPH’s ‘BBB’ IDR. DLPH’s actual leverage at Sept. 30, 2015 was 1.2x, including $242 million in short-term receivables factoring that was primarily used to fund a deposit for the HTY acquisition. Fitch previously stated that DLPH’s IDR incorporated the company’s leverage target of 1.5x, rather than its actual lower level of leverage.
Other elements of DLPH’s business profile and credit profile remain largely intact. It maintains strong market positions in the electrical, infotainment, safety and powertrain product categories. The high value-added nature of DLPH’s products and its low-cost manufacturing footprint continue to result in free cash flow (FCF) that is high for the auto supply industry, resulting in relatively strong financial flexibility. In addition, although DLPH has recently targeted a substantial amount of cash toward shareholder-friendly activities, the company’s financial practices are relatively conservative. Other credit strengths include its strong liquidity position, minor pension obligations, and manageable debt maturity profile.
–The HTY acquisition closes in the fourth quarter of 2015;
–Low- to mid-single digit global auto production growth over the intermediate term;
–An increase in DLPH’s penetration rates, resulting in revenue rising at a faster rate than overall vehicle production;
–Capital spending equal to between 5% and 6% of revenue over the intermediate term;
–Annual increases in common stock dividends;
–Annual FCF in the $700 million to $800 million range, equating to a FCF margin of 4% to 5%;
–The company refinances its significant debt maturities over the intermediate term;
–The company maintains roughly $1 billion in cash on its balance sheet, with excess cash used for acquisitions or share repurchases.
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 currently rates DLPH and Delphi as follows:
–Senior unsecured notes rating ‘BBB’.
–Unsecured term loan rating ‘BBB’;
–Unsecured revolving credit facility rating ‘BBB’;
–Senior unsecured notes rating ‘BBB’.
The Rating Outlook is Stable.
Date of Relevant Committee: July 31, 2015
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage (Aug. 17, 2015);
–Delphi Automotive PLC – Ratings Navigator (Oct. 7, 2015).
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Delphi Automotive PLC – Ratings Navigator
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Craig D. Fraser
Alyssa Castelli, +1 212-908-0540