Fitch Rates Meritor's Proposed Senior Unsecured Notes 'B-/RR5'
CHICAGO -- May 28, 2013
Fitch Ratings has assigned a rating of 'B-/RR5' to Meritor, Inc.'s (MTOR) $250
million in proposed senior unsecured notes due 2021. The Issuer Default Rating
(IDR) for MTOR is 'B' and the Rating Outlook is Stable.
The proposed notes will be guaranteed by certain current and future
subsidiaries of MTOR that also guarantee the company's secured revolving
credit facility and term loan A. MTOR intends to use proceeds from the
proposed notes to fund a tender offer for its $251 million in 8.125% senior
unsecured notes due 2015. Refinancing the 8.125% notes with proceeds from the
proposed notes will significantly reduce the company's 2015 debt maturities.
In addition, by redeeming at least $151 million of the 8.125% notes, MTOR will
avoid an early maturity of its revolver and term loan A in 2015. Provisions in
the company's credit agreement call for an early maturity of the revolver and
term loan A in June 2015, rather than their stated maturity of April 2017, if
more than $100 million in principal remains outstanding on the 8.125% senior
notes on June 1, 2015.
KEY RATING DRIVERS
MTOR's ratings are supported by the work the company has undertaken over the
past two years to improve product pricing and reduce costs. Progress on these
factors contributed to the company posting a 5.6% Fitch-calculated EBITDA
margin in the 12 months ended March 31, 2013, down from 6.1% the same period
in 2012, despite a 23% decline in revenue between both periods. Fitch expects
the company will post an EBITDA margin in the 6% range for the full fiscal
year (FY) 2013, similar to the level it posted in FY2012 despite its public
guidance that revenue will fall to about $3.8 billion in FY2013 from $4.4
billion in FY2012. Fitch notes that annual margins in the 6% range are among
the highest that MTOR has produced since well before the last recession, and
additional restructuring actions the company is currently contemplating will
likely drive further margin growth over the intermediate term.
Concerns include MTOR's exposure to the volatile commercial and military
vehicle sectors, relatively high leverage, weak free cash flow (FCF)
generation, and substantially underfunded pension plans. As noted above, MTOR
has made meaningful progress on reducing its cost structure to cope with the
heavy cyclicality of its end-markets, but it remains highly exposed to changes
in commercial vehicle demand, as seen in the substantial decline in revenue
over the past year. The funded status and funding requirements of MTOR's
pension plans also weigh on the company's ratings. As of Sept. 30, 2012
(MTOR's fiscal year end), the company's global pension plans were only 74%
funded, with a $529 million net liability, of which $448 million was in the
U.S. MTOR expects required cash contributions to its global pension plans to
total $73 million in FY2013, which will constitute a meaningful use of its
MTOR's leverage (debt/Fitch-calculated EBITDA) at March 31, 2013, was 5.1x,
with $1.1 billion in debt and last 12 months (LTM) EBITDA (as calculated by
Fitch) of $217 million. LTM FCF at March 31, 2013 was negative $55 million,
resulting in a negative FCF margin of 1.4%. Fitch notes, however, that MTOR's
FCF in the period included $25 million in discretionary pension contributions
made in the company's fiscal fourth quarter. Fitch expects FCF to remain under
pressure in the near to intermediate term as the company continues to work
through its European restructuring program. Despite its negative FCF, MTOR's
liquidity at March 31, 2013, remained adequate and included $117 million in
cash and cash equivalents and $429 million in availability on its secured
revolver. Current maturities of long-term debt totaled only $25 million.
In April 2013, MTOR announced a series of initiatives dubbed 'M2016', intended
to improve the company's profitability and strengthen its balance sheet. From
a credit perspective, MTOR plans to reduce leverage and increase the funded
status of its pension plans. Consistent with this plan, in April 2013 MTOR
announced the intention to sell its interest in Suspensys Sistemas Automotivos
Ltda., a Brazilian joint venture (JV) to its JV partner, Randon S.A.
Implementos E Participacoes, for $190 million in cash and $5 million in lease
abatements. MTOR plans to use proceeds from the sale toward strengthening its
balance sheet. Although the company has not specifically stated what it might
target the proceeds for, Fitch notes that MTOR can prepay the remaining $95
million outstanding on its term loan A without penalty.
The rating of 'B-/RR5' on the company's unsecured notes (including the
proposed notes) reflects Fitch's expectation that recovery would be below
average, in the 10% to 30% range, in a distressed scenario. The relatively low
level of expected recovery for the unsecured debt is due, in part, to the
substantial amount of higher-priority secured debt in MTOR's capital
structure, including the potential for a full draw on both its secured
revolver and its U.S. accounts receivable securitization facility.
Although the Stable Outlook reflects Fitch's expectation that MTOR's ratings
will not change in the near term, over the longer term Fitch could upgrade the
ratings if market conditions strengthen and continued restructuring actions
lead to higher margins, increased FCF and stronger credit protection metrics.
In particular, Fitch will look for the company to begin producing positive FCF
on a sustained basis and for leverage (debt/Fitch-calculated EBITDA) to fall
below 4.0x for an extended period. On the other hand, Fitch could undertake a
negative rating action on MTOR if the global commercial truck and industrial
markets materially deteriorate further, resulting in a meaningful erosion of
the company's liquidity and a substantial weakening of its credit profile.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Nov. 13, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 13, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Evaluating Corporate Governance
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Corporate Rating Methodology
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Stephen Brown, +1 312-368-3139
Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602
Craig D. Fraser, +1 212-908-0310
John C. Culver, CFA, +1 312-368-3216
Brian Bertsch, +1 212-908-0549
Press spacebar to pause and continue. Press esc to stop.