Fitch Assigns Initial 'BBB-' IDR to Delphi Automotive; Outlook Stable
CHICAGO -- July 23, 2012
Fitch Ratings has assigned initial Issuer Default Ratings of 'BBB-' to Delphi
Automotive PLC (DLPH) and its subsidiary Delphi Corporation. A full list of
ratings actions follows at the end of this release. The ratings apply to $982
million in secured term loans, a $1.3 billion secured revolving credit
facility and $1 billion in senior unsecured notes. The Rating Outlook for DLPH
and Delphi Corporation is Stable.
DLPH's ratings reflect the auto supplier's strong competitive position as a
producer of highly-engineered products in the electrical, infotainment,
safety, powertrain and thermal segments. The technologically advanced nature
of many of the company's products, combined with DLPH's focus on low-cost
manufacturing, has led to relatively high margins and solid free cash flow
over the past two years. The company is also well positioned to take advantage
of key trends in the auto industry with a dual focus on developing and
producing products that help auto manufacturers meet global safety and
emissions requirements and that accommodate drivers' desire for increased
communications connectedness. The company's strong liquidity position, low
leverage and limited pension obligations are other important rating drivers.
Concerns include the highly cyclical nature of the global auto industry,
volatile raw material costs, and DLPH's significant exposure to the European
auto market. However, these concerns are mitigated somewhat by auto
manufacturers' increasing adoption of DLPH's various technologies, which have
helped it grow revenue at a faster rate than auto production growth.
Nonetheless, a broad-based global downturn in auto production would put
potentially significant pressure on the company's margins and free cash flow.
Like many other global auto suppliers, another concern is a mismatch between
the location of the company's debt and its revenue generation, with most of
the company's revenue generated outside the U.S. but virtually all of its debt
issued in the U.S. However, this is currently less of an issue for DLPH, as
its incorporation outside the U.S. under the laws of Jersey reduces the tax
cost of moving cash into the U.S. as compared to suppliers that are
incorporated in the U.S.
The Stable Outlook on DLPH and Delphi Corporation indicates that a near-term
change in the company's ratings is not likely. Fitch could consider an upgrade
to 'BBB' longer-term if leverage continues to be low and free cash flow and
margins remain high for an extended period. In particular, a continued strong
performance in a weakened global auto market would be a potential driver of
On the other hand, Fitch could consider a revision in the Outlook to Negative
or a downgrade in the ratings on an unexpected sharp decline in global auto
production or if the company undertakes a large, debt-financed acquisition in
addition to its current offer for FCI Group's Motorized Vehicles Division
(MVL). In addition, a significant increase in long-term debt to support
shareholder-friendly actions, such as share repurchases or special dividends,
would also be viewed negatively by Fitch, although cash returns to
shareholders via free cash flow could be consistent with the current ratings,
provided liquidity remains sufficient for continued financial flexibility.
DLPH's business profile today is significantly different from the company that
filed for Chapter 11 protection in 2005. Importantly, in addition to
strengthening its balance sheet, the company's restructuring streamlined its
product offerings, reduced its cost structure and diversified its customer and
geographic diversification. Over the past seven years, DLPH has reduced its
global headcount by 22% and closed over 70 manufacturing sites. Today, only
five of the company's 114 manufacturing facilities are in the U.S., with 91%
of its workforce now located in low-cost countries. In addition, about 39,000
of the company's employees are temporary workers. The results of this
operational restructuring have been key to the company's ability to produce
margins that are above industry average. They also will provide DLPH with
meaningful flexibility in the case of a downturn in demand.
An important component of Fitch's analysis was an examination of the effect
that a significant decline in global demand would have on DLPH's financial
position. With a strong liquidity position, low leverage and significant
operational flexibility, Fitch believes the company is well-positioned to
withstand a demand decline on par with what was seen in 2009. Notably, even in
such a heavily stressed environment, Fitch expects the company could continue
producing positive free cash flow while maintaining leverage within the
covenant level specified in its secured credit facility.
As noted above, in May 2012, DLPH made a binding offer to purchase MVL for a
cash-free and debt-free purchase price of Eur765 million (about $972 million).
DLPH will fund the acquisition through a combination of cash on hand and the
utilization of its current debt facilities. Although the acquisition will
temporarily reduce DLPH's liquidity and increase its leverage, Fitch believes
it will strengthen the company's position in the growing automotive connector
arena, as well as diversify the company's customer base and expand its Asian
footprint. DLPH expects the acquisition to be accretive earnings per share
(excluding one-time items) in 2013, and incremental free cash flow from the
acquisition can be used to reduce any revolver borrowings that might be used
to fund it.
DLPH maintains a credit profile that is among the strongest in the auto
supplier sector. Leverage (debt/Fitch-calculated EBITDA) at the end of the
2012 first quarter was 0.9x, with $2.1 billion in debt and last 12 months
(LTM) EBITDA of $2.2 billion. The company's liquidity position at period end
was relatively strong, including $1.4 billion in unrestricted cash and cash
equivalents and nearly full availability on its $1.3 billion secured revolving
credit facility. Short-term debt and current maturities totaled only $89
million at period end, and DLPH has no significant debt maturities until 2016,
when $162 million comes due, mostly related to a balloon payment on its
Tranche A secured term loan.
LTM free cash flow (FCF) was $805 million at the end of the first quarter,
leading to a 5% FCF margin. Funds flow from operations (FFO) was a robust $1.7
billion in the LTM period, partially offset by $177 million in cash used for
working capital and $709 million in capital expenditures. Fitch expects free
cash flow to remain solid over the intermediate term as growth in operating
cash flow more than offsets an expected rise in capital spending. DLPH has
guided publicly to producing cash flow before financing in 2012 of $1 billion,
including $750 million of capital spending.
Similar to a number of other large U.S. auto suppliers, DLPH's debt has been
issued primarily in the U.S., while about 69% of the company's revenue in 2011
was derived outside the U.S. The company's debt is largely guaranteed by its
U.S. operating subsidiaries, and its direct and indirect parents. Although
this creates a mismatch between the source of DLPH's cash and its debt
obligations, Fitch believes that the company has sufficient cash management
flexibility and credit facility availability to meet its cash obligations in
the U.S. without significant concerns. Notably, because of DLPH's
incorporation outside the U.S. under the laws of Jersey, it is not subject to
the same tax costs that affect U.S.-incorporated companies when moving cash
into the U.S. However, the U.S. Internal Revenue Service (IRS) has stated that
it may challenge DLPH's status as a non-U.S. corporation for U.S. tax
purposes. If the IRS were to successfully assert that DLPH is a U.S.
corporation, there would be additional tax costs associated with moving cash
into the U.S.
DLPH's U.S. pension plan was assumed by the Pension Benefit Guaranty
Corporation during the predecessor company's Chapter 11 bankruptcy
reorganization. As such, DLPH's only defined benefit pension plan in the U.S.
is a small, unfunded supplemental executive retirement plan (SERP). Outside
the U.S., the company sponsors several funded and unfunded plans that
collectively were underfunded by $609 million at year-end 2011. DLPH estimates
that required pension contributions will total $64 million in 2012. Fitch does
not currently view DLPH's pension plans as a meaningful credit risk.
The secured revolver and term loans that comprise Delphi Corporation's credit
facility are rated one notch above Delphi Corporation's IDR, reflecting their
collateral coverage. However, the assets of the guarantor subsidiaries
comprise less than one-third of DLPH's consolidated assets. The credit
facility agreement includes a financial covenant that requires DLPH to
maintain a leverage ratio below 2.75x (although the calculation of debt in the
covenant is net of the lesser of $750 million or unrestricted cash and cash
equivalents). The credit facility does not contain a ratings-related springing
lien provision. With a significant amount of secured debt having priority over
them, Delphi Corporation's senior unsecured notes are rated one notch lower
than the secured credit facility at the same level as Delphi Corporation's
WHAT COULD TRIGGER A RATING ACTION
Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:
--Maintaining leverage below 1.0x;
--Producing free cash flow and margins that remain above industry average for
an extended period;
--Demonstrating an ability to maintain a strong operational and financial
performance through an industry downturn.
Negative: Future developments that may, individually or collectively, lead to
a negative rating action include:
--An unexpected sharp decline in global auto production;
--An acquisition that results in a meaningful increase in long-term leverage;
--An increase in long-term debt to support shareholder-friendly activities,
such as share repurchases or a special dividend.
Fitch has assigned the following ratings to DLPH and Delphi Corporation:
--Secured term loan rating 'BBB';
--Secured revolving credit facility rating 'BBB';
--Senior unsecured rating 'BBB-';
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Evaluating Corporate Governance' (Dec. 13, 2011)
--'2012 Outlook: U.S. Auto Manufacturers and Suppliers' (Dec. 15, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Evaluating Corporate Governance
2012 Outlook: U.S. Auto Manufacturers and Suppliers
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Fitch Inc., 70 West Madison Street, Chicago, IL 60602
Craig D. Fraser
Mark C. Sadeghian, CFA
Brian Bertsch, +1-212-908-0549 (New York
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