Fitch Affirms BorgWarner's IDR at 'BBB+'; Outlook Stable
CHICAGO -- April 16, 2013
Fitch Ratings has affirmed BorgWarner Inc.'s (BWA) Issuer Default Rating (IDR)
at 'BBB+'. Fitch has also affirmed BWA's unsecured credit facility and senior
unsecured notes ratings at 'BBB+'. A complete list of the ratings is provided
at the end of this release. Fitch's ratings apply to a $650 million unsecured
revolving credit facility and $655 million (par value) in senior unsecured
notes. The Rating Outlook for BWA is Stable.
KEY RATING DRIVERS
BWA's ratings are supported by the company's strong competitive position as a
key global supplier of engine and drivetrain components, expectations for
continued modest growth in global auto production, significant free cash flow
generation potential, solid liquidity position and relatively low leverage.
BWA fared better than most U.S. auto suppliers during the last downturn in the
auto market, and with a product portfolio largely focused on technologies that
enhance fuel efficiency, such as turbochargers and dual-clutch transmissions,
its net sales growth has tended to outpace the growth rate of global auto
production. Higher capacity utilization and a focus on cost control have kept
BWA's margins relatively robust, which will contribute to strong free cash
flow generation over the intermediate term and provide the company with
significant financial flexibility.
Concerns include the cyclicality of the global auto industry and BWA's
significant exposure to the weak European auto market. However, these concerns
are partially mitigated by the increasing market penetration of BWA's
fuel-saving technologies. Nonetheless, a broad-based global downturn in auto
production would pressure the company's profitability and free cash flow. In
Europe, where BWA generated 52% of its 2012 revenue, auto sales are likely to
experience a further decline in the mid-single digit range in 2013, although
production of vehicles using BWA-supplied technologies will be partially
supported by exports, particularly to the U.S. and China. Fitch also notes
that BWA's largest European customer is Volkswagen AG, which the strongest of
Europe's volume manufacturers. An additional concern is BWA's moderately
acquisitive nature, although most recent acquisitions have been relatively
modest and only resulted in a temporary increase in leverage.
BWA's liquidity position at year-end 2012 remained relatively strong, with
$716 million in cash and $510 million in revolver availability (after
accounting for $140 million in outstanding borrowings), for a total liquidity
position of over $1.2 billion. The company also has access to a $110 million
receivables securitization facility that was fully utilized at year-end 2012.
Current maturities of long-term debt at year-end 2012 totaled only $4.3
million, although BWA also had $239 million in short-term borrowings
outstanding, which included the aforementioned receivables securitization
borrowings. BWA's next significant long-term debt maturity does not occur
until 2016, when $150 million in senior unsecured notes comes due. Fitch
expects most of the short-term borrowings will be refinanced. The lack of
significant long-term debt maturities, combined with Fitch's expectations for
continued strong positive free cash flow, will provide the company with
substantial financial flexibility over the intermediate term.
Similar to most other U.S.-based global auto suppliers, most of BWA's debt has
been issued in the U.S. and is guaranteed by the company's U.S. subsidiaries,
while nearly three-quarters of the company's revenue is derived outside the
U.S. Although this creates a mismatch between the source of BWA'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.
As a result of its improved operating performance and debt reduction, BWA's
credit profile has strengthened over the past year. As of year-end 2012, BWA's
leverage (debt/Fitch-calculated EBITDA) was 0.9 times (x), down from 1.2x at
year-end 2011. Fitch's calculation of EBITDA increased to $1.2 billion in 2012
from $1.1 billion in 2011. Although BWA's revenue grew only 1% in 2012 as
foreign exchange, weak European auto production and business dispositions
limited growth, the company's focus on cost management resulted in an increase
in its EBITDA margin to 16.5%, 110 basis points above the very strong 15.4%
margin achieved in 2011. Further EBITDA growth over the intermediate term will
contribute to lower leverage going forward, although Fitch expects debt to
remain near the year-end 2012 level as the company focuses on its leverage
BWA recently has communicated publicly that it is targeting a net debt to
capitalization ratio of 15% to 30%. At year-end 2012, the actual ratio was
10%, suggesting that net debt will rise. However, Fitch expects the company
will most likely achieve this by reducing its cash level through share
repurchases. Pro forma for BWA's year-end debt level, a $200 million decline
in the company's cash balance would increase the net debt to capitalization
ratio to 15%. In 2012, BWA used $296 million in cash for share repurchases,
although a portion of this was used to settle the conversion of the company's
convertible note in April 2012. Absent any significant acquisition activity,
Fitch expects share repurchases to continue at an elevated level through the
intermediate term. Although cash will decline as the company works to achieve
its targeted net debt to capitalization ratio, Fitch notes that BWA's cash
level at year-end 2012 was significantly higher than historical levels, even
with the share repurchases completed during the year, and its free cash flow
generation prospects and revolver availability will continue to provide it
with significant liquidity access.
In addition to share repurchases, Fitch expects BWA to continue seeking
acquisition opportunities. Traditionally, BWA has been judicious in its
acquisition selection, typically acquiring companies, or parts of companies,
in order to obtain particular technologies that complement its existing
product offerings. In addition, the company is relatively methodical in its
approach to acquisitions, generally identifying potential targets well before
they become available. Based on this history, Fitch expects most acquisitions
will be moderate in size, likely under $500 million, and will be funded with
cash on hand and temporary revolver borrowings. Therefore, although
acquisitions could present some credit risk, Fitch believes the company has
the financial capacity to undertake moderately sized acquisitions while
keeping its overall credit profile consistent with its 'BBB+' IDR.
Free cash flow in 2012 was $471 million, up from $315 million in 2011, as
working capital shifted from a $136 million use of cash in 2011 to an $11
million source in 2012. The free cash flow margin in 2012 of 6.6% was notably
strong for an auto supplier. Capital spending increased modestly to $407
million in 2012 from $394 million in 2011. Fitch expects free cash flow to
remain solidly positive over the intermediate term as operating cash flow
growth more than offsets an expected rise in capital spending to support
growth and new product programs. BWA has guided publicly to operating cash
flow in the $900 million to $1 billion range and capital spending of $450
million to $500 million in 2013.
BWA's pension plans were relatively well funded at year-end 2012, particularly
in comparison with many other U.S. auto suppliers. The company's U.S. plans
were 86% funded at Dec. 31, 2012, with an underfunded status of only $47
million. Fitch notes that BWA's U.S. plans were closed to new entrants since
1999. The company also sponsors defined benefit plans in certain countries
outside the U.S., some of which are unfunded. BWA did not make any
contributions to its U.S. plans in 2012, but it contributed $18 million to its
non-U.S. plans during the year. The company expects to contribute between $15
million and $25 million to its global plans in 2013, including $7.1 million of
contractually-required contributions. The remainder of the planned
contributions will be voluntary. Fitch does not currently view BWA's pension
plans as a meaningful credit risk.
The Stable Rating Outlook on BWA indicates that a near-term upgrade of the
company's ratings is unlikely. Typically, the inherent cyclicality and
potential financial pressures of the auto supply industry result in a soft cap
on IDRs at the 'BBB+' level, although in rare cases a supplier with a very
strong business profile and unusually strong credit protection metrics could
be considered for the 'A' category.
Fitch could consider a negative rating action on BWA in the case of an
unexpected sharp drop in global auto production or if the company undertakes a
larger-than-expected, debt-financed acquisition. A significant increase in
long-term debt to support shareholder-friendly actions, such as share
repurchases or a special dividend, would also be viewed negatively by Fitch,
but cash returns to shareholders via free cash flow and excess liquidity could
be consistent with the current ratings, provided the company maintains a
sufficient liquidity cushion to protect against an unexpected downturn.
Fitch has affirmed the following ratings of BWA with a Stable Rating Outlook:
--IDR at 'BBB+';
--Unsecured credit facility rating at 'BBB+';
--Senior unsecured notes rating at 'BBB+'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', (Aug. 8, 2012);
--'Evaluating Corporate Governance', (Dec. 12, 2012);
--'2012 Outlook: U.S. Auto Manufacturers and Suppliers', (Dec. 17, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
Evaluating Corporate Governance
2012 Outlook: U.S. Auto Manufacturers and Suppliers
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Stephen Brown, +1-312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Chad Walker, +1-312-368-2056
Craig D. Fraser, +1-212-908-0310
Brian Bertsch, New York, +1 212-908-0549
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