Fitch Affirms TRW's IDR at 'BBB-'; Rating Outlook Stable
CHICAGO -- March 19, 2013
Fitch Ratings has affirmed the Issuer-Default Ratings (IDRs) of TRW Automotive
Holdings Corp. (TRW) and its TRW Automotive Inc. (TAI) subsidiary at 'BBB-'.
In addition, Fitch has affirmed TAI's senior secured credit facility and
senior unsecured ratings, both at 'BBB-'. A full list of rating actions
follows at the end of this press release. Fitch's ratings apply to a $1.4
billion secured revolving credit facility and $1.8 billion in senior unsecured
notes. The Rating Outlook for both TRW and TAI is 'Stable'.
KEY RATING DRIVERS
TRW's ratings are supported by the auto supplier's relatively strong credit
profile, which is characterized by low leverage, high margins and consistently
positive free cash flow. TRW continued to record positive free cash flow in
2012 despite weak light vehicle production levels in several of the company's
key markets, particularly Western Europe. Although the company's EBITDA margin
(as calculated by Fitch) was 9.8% in 2012, down from 10.6% in 2011, it
nonetheless remained relatively strong for the auto supply industry. The lower
margin also reflected costs associated with constructing 11 new plants that
will come on line over the next 24 months, including nine new plants in China.
Over the intermediate term, Fitch expects TRW will continue to produce
positive free cash flow despite a planned increase in capital spending, which
will provide the company with meaningful financial flexibility. While there
are notable risks to TRW's credit profile, Fitch believes the company has the
financial strength to withstand several negative developments while
maintaining an investment grade profile.
Concerns include the cyclicality of the auto industry, volatility in raw
material costs, and TRW's significant exposure to the European auto market.
Mitigating these concerns somewhat is the company's diverse global customer
base and increasing penetration rates on a number of vehicle platforms, which
has helped to support sales in weaker markets. TRW's relatively heavy exposure
to Europe, where almost 43% of its revenue was generated in 2012, is of
greatest concern, although it is notable that Volkswagen AG, the strongest of
Europe's volume manufacturers, is TRW's largest customer in the region, and
TRW has continued to perform well despite the sharp decline in European
vehicle production. TRW produced positive free cash flow during the 2008 to
2009 downturn, and today it is better positioned to withstand another demand
shock than it was then, with a lower cost structure and a stronger balance
Another notable risk to TRW's credit profile is the potential for an adverse
outcome resulting from an ongoing antitrust investigation in Europe. The U.S.
Department of Justice (DOJ) concluded its own investigation of the matter in
2012, resulting in TRW paying a $5.1 million fine. Investigations like this
one can take years to resolve, so there may not be a near-term resolution to
the issue. Fitch notes that although the relatively low fine paid following
the conclusion of the DOJ's investigation could bode well for the outcome of
the European case, there is not a direct correlation between the outcome in
the U.S. and the ultimate resolution of the case in Europe. Therefore, any
potential penalties stemming from the European case could be significantly
higher than the fine paid in the U.S. Fitch will evaluate the effect of the
investigation on TRW's credit profile when more information becomes available.
The company's substantial liquidity position and positive free cash flow will
help to mitigate the effect of any required cash outlays on TRW's credit
In the fourth quarter of 2012, TRW initiated a $1 billion share repurchase
program that runs through Dec. 14, 2014. As of Dec. 31, 2012, the company had
repurchased a total of $268 million in shares under this program and an
existing anti-dilution program, and it has stated that it expects to purchase
another $500 million in shares in 2013. Although the size of the program is
significant, Fitch expects the company to fund it using free cash flow and
cash on hand. Fitch also expects that management will be judicious in its
repurchase activity, slowing or stopping the program if free cash flow is
weaker than expected, so the program is not likely to have a detrimental
effect on the company's overall credit profile.
In February 2013, TAI issued $400 million in senior unsecured notes due 2021
in a 144A offering. The company has not been explicit in how it expects to use
the proceeds, other than for general corporate purposes. However, Fitch notes
that the company has several potential calls on its cash over the next 18
months, including $533 million in note maturities in the first quarter of
2014. TRW also has the ability to call $219 million in 8.875% bonds due 2017
in December 2013, which may be an attractive option given the high cost of
that debt. Extra liquidity from the new notes could also provide the company
with a cash cushion in case it is required to make a significant near-term
cash payment tied to its antitrust case in Europe.
Following two years of strong growth, TRW's revenue grew only 1.2% in 2012 on
a significant decline in European vehicle production and negative foreign
exchange effects. Despite this weak revenue growth, TRW was able to produce a
relatively strong 9.8% EBITDA margin (as calculated by Fitch) for the year. As
noted earlier, this included the effect of costs associated with new plant
construction. The plant construction also contributed to a $52 million
increase in capital spending, which rose to $623 million. Even with the
decline in margins and the rise in capital spending, the company produced
solid free cash flow of $333 million. TRW has produced positive free cash flow
on an annual basis each year since 2006, including a total of $545 million
during the 2008 to 2009 downturn. Fitch expects TRW to continue producing
solidly positive free cash flow over the intermediate term, although the free
cash flow margin, which was only 2% in 2012, will be constrained in 2013 and
2014 by capital spending tied to the new plant construction.
TRW's leverage (debt/Fitch-calculated EBITDA) at year end 2012 was 0.9x, with
$1.5 billion in debt and full-year EBITDA (as calculated by Fitch) of $1.6
billion. On a pro-forma basis, including the $400 million in new notes issued
last month, leverage would still have been only 1.2x. FFO adjusted leverage
was 2.1x at year end 2012 and would have been 2.4x on a pro-forma basis. Total
liquidity at year end 2012 was strong and included $1.2 billion in cash and
cash equivalents and $1.4 billion in revolver availability. Fitch expects TRW
to maintain a strong liquidity position over the intermediate term, although
its cash level could decline somewhat as the company targets a portion of its
free cash flow toward share repurchases. Further debt reduction is also likely
to be less of a focus, given the company's low leverage. As such, Fitch
expects at least a portion of the early 2014 debt maturity to be refinanced.
However, Fitch expects TRW's credit profile to remain consistent with its
On a consolidated basis, TRW's global pension plans were 99% funded at year
end 2012, although this was due to a significantly overfunded position
(according to U.S. GAAP accounting) in the company's U.K. plans. In the U.S.,
TRW's pension plans were 75% funded, with a benefit obligation of $1.1 billion
and plan assets of $804 million. On a dollar basis, the underfunded position
of the U.S. plans was only $269 million at year-end 2012, which Fitch believes
is manageable given TRW's substantial liquidity position and free cash flow
generation potential. TRW expects required contributions to its global pension
plans will total $150 million in 2013, including $50 million in the U.S. TRW
has been working on de-risking its pension plans, and in 2012 it offered
lump-sum buyouts to certain U.S. retirees, which contributed to a $211 million
overall decline in the projected benefit obligation of the U.S. plans despite
a 75 basis point decline in the discount rate used to measure plan assets to
4%. The company also settled some smaller plans in the U.K. in 2011 and 2012.
The harmonization of TAI's secured credit facility rating with the company's
IDR and senior unsecured ratings is based upon provisions in the facility that
allow for the collateral to be released when the company is assigned an
investment-grade rating from certain rating agencies. Although the conditions
necessary to release the collateral have not yet been met, Fitch's rating for
the facility incorporates the potential that the company could have the option
to release the collateral in the intermediate term.
The Stable Outlook on TRW and TAI suggests that a near-term change in the
ratings is unlikely. Longer term, Fitch could consider a positive rating
action if global auto market conditions improve, particularly in Europe,
resulting in increased profitability and free cash flow. In particular,
sustained EBITDA margins in the low- to mid-teens would contribute to a
positive rating action. Other factors that could lead to a positive rating
action would be sustained leverage in the low 1.0x range and consistent free
cash flow margins in the mid-single digit range.
On the other hand, a meaningful slowdown in the global automotive market that
leads to significant margin pressure and markedly lower (or negative) free
cash flow could lead Fitch to undertake a negative rating action. A very
adverse outcome from the European antitrust investigation or a company
decision to significantly increase leverage to fund shareholder-friendly
actions could also result in a negative rating action. However, Fitch believes
there is substantial cushion in the current ratings to withstand several
adverse developments before a negative rating action would be considered.
Fitch affirms the following ratings with a Stable Outlook:
IDR at 'BBB-'.
IDR at 'BBB-';
Secured credit facility rating at 'BBB-';
Senior unsecured rating at 'BBB-'.
Additional information is available at 'www.fitchratings.com'. The ratings
above were unsolicited and have been provided by Fitch as a service to
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);
--'Treatment of Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 13, 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
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance
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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
Jason Pompeii, +1 312-368-3210
Brian Bertsch, +1 212-908-0549
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