Fitch Rates American Axle's Proposed Notes 'B-/RR6'
CHICAGO -- February 14, 2013
Fitch Ratings has assigned a rating of 'B-/RR6' to American Axle &
Manufacturing, Inc.'s (AAM) proposed issuance of $400 million in senior
unsecured notes due 2021. AAM is the principal operating subsidiary of
American Axle & Manufacturing Holdings, Inc. (AXL). Fitch's Issuer Default
Rating (IDRs) for both AXL and AAM is 'B+' and the Rating Outlook for both is
The proposed new notes will be guaranteed by AXL and each of its subsidiaries
that also guarantee AAM's 6.625% senior unsecured notes and certain future
subsidiaries of the company. If the notes are rated investment grade by
certain rating agencies, AAM may request to have the guarantees released. AAM
intends to use the proceeds from the new notes to redeem its $300 million in
7.875% senior unsecured notes due 2017 and for general corporate purposes.
Concurrent with the offering of the proposed notes, AAM has made a tender
offer for all of the 7.875% notes outstanding. Although the proposed notes
will result in a net increase in debt following the 7.875% note redemption,
the transaction will reduce the principal amount of bond debt maturing in 2017
to $340 million from a relatively heavy $640 million, as only the remaining
2017 note maturity will be the company's 9.25% senior secured notes. Fitch
notes that AAM has an opportunity to prepay an additional $42.5 million in
principal on the 9.25% notes later this year.
KEY RATING DRIVERS
The ratings for AXL and AAM continue reflect the strengthening of the
drivetrain and driveline supplier's credit profile over the past several years
as conditions in the global light vehicle market have improved. In particular,
the company has benefited from relatively strong pickup and sport-utility
vehicle (SUV) production at its two largest customers, General Motors Company
(GM) and Chrysler Group LLC, and its margin performance continues to be among
the strongest in the auto supplier industry, despite some recent weakening
tied to the start of new product programs. Fundamentally, AXL's book of
business continues to strengthen as the companies diversifies its revenue base
away from a heavy reliance on U.S. light truck production. Its $1.25 billion
backlog of new business for the 2013 through 2015 timeframe is heavily
weighted toward passenger cars and crossover vehicles. AXL also continues to
increase the geographical diversity of its revenue base, with new business
wins from an increasing number of non-U.S. manufacturers. Notably, however,
the company's exposure to the weak European market remains small, at only
about 3% of 2012 revenue.
Despite its increased revenue diversification, in the near term, AXL's ratings
will continue to be weighed down by its continued heavy exposure to GM's light
truck platform, although new versions of that truck projected to go on sale in
the second quarter of this year could boost AXL's near-term sales. Also
weighing on the ratings is Fitch's expectation that near-term free cash flow
will be limited by the company's need to continue making investments to
support the significant growth in its business expected over the longer term.
There is also a heightened risk of increased costs tied to production
inefficiencies as a large number of new product programs ramp up over the next
several years. In the second half of 2012, AXL experienced several of these
sorts of issues, which led to a decline in the company's margin performance
that could persist into early 2013. Going forward, Fitch expects AXL's margins
to be a little lower than their historical level, but still relatively strong,
as the company's product portfolio becomes more diversified.
The positive outlook on AXL and AAM reflects Fitch's expectation that the
company's credit profile will strengthen over the intermediate term, as
business levels grow and revenue becomes more diversified. Fitch expects free
cash flow and cash liquidity to rise on higher vehicle production volumes and
increased penetration, while higher earnings are also likely to contribute to
declining leverage, which could fall below 3.5x by year-end 2013. Following
$225 million in contributions to its pension plans in 2012, a portion of which
was debt-financed, Fitch expects the company's pension funding requirements to
be minimal over the next several years. Longer term, Fitch expects the company
to continue taking a relatively conservative approach to financial management,
with a focus on reducing leverage while maintaining a strong liquidity
The Recovery Rating of 'RR6' on AAM's senior unsecured notes, including the
proposed notes, reflects the significant amount of secured debt in the
company's capital structure (assuming a fully drawn revolving credit facility)
that is senior to the company's unsecured obligations. This drives Fitch's
estimated recovery prospects for the company's unsecured notes into the 0% to
10% range in a distressed scenario.
AXL's leverage (debt/Fitch-calculated EBITDA) increased during 2012 to 4.1x
from 3.1x as the company debt-financed certain contributions to its pension
plans above required minimums and as EBITDA was pressured by costs associated
with new product programs. Overall, debt rose to $1.5 billion from $1.2
billion while Fitch-calculated EBITDA (adjusted for restructuring expenses)
declined to $352 million from $383 million. Free cash flow for the year was
negative $383 million, but this included $115 million of special pension
contributions related to plant closures and an estimated $75 million of
voluntary pension contributions. The negative free cash flow also included $89
million of other non-recurring cash items, such as restructuring costs, debt
refinancing costs and a change in payment terms to GM. Fitch expects free cash
flow to improve significantly in 2013, although it will remain pressured by
elevated capital expenditures and other costs tied to new product programs.
Despite the negative free cash flow in 2012, AXL's liquidity position at
year-end was adequate, with $62 million in cash and $415 million in
availability on the company's secured revolver.
Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:
--Continued diversification of the company's revenue base;
--Positive free cash flow generation;
--A decline in leverage;
--Ongoing margin performance near top of the auto supplier industry.
Negative: The current Rating Outlook is Positive. As a result, Fitch's
sensitivities do not currently anticipate developments with a material
likelihood, individually or collectively, leading to a rating downgrade.
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. 8, 2012);
--Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
(Nov. 13, 2012);
--Evaluating Corporate Governance (Dec. 12, 2012);
--2013 Outlook: U.S. Auto Manufacturers and Suppliers (Dec. 17, 2012).
Applicable Criteria and Related Research:
2013 Outlook: U.S. Auto Manufacturers and Suppliers
Evaluating Corporate Governance
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology
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Stephen Brown, +1-312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Craig D. Fraser, +1-212-908-0310
Eric C. Ause, +1-312-606-2302
Brian Bertsch, New York, +1-212-908-0549
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