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Fitch Rates American Axle's Secured Term Loan A 'BB+/RR1'

  Fitch Rates American Axle's Secured Term Loan A 'BB+/RR1'

Business Wire

CHICAGO -- September 16, 2013

Fitch Ratings has assigned a rating of 'BB+/RR1' to American Axle &
Manufacturing, Inc.'s (AAM) new $150 million secured term loan A due 2018. AAM
is the principal operating subsidiary of American Axle & Manufacturing
Holdings, Inc. (AXL). The Fitch Issuer Default Rating (IDR) for both AXL and
AAM is 'B+' and the Rating Outlook for both is Positive.

The new term loan A is part of an amendment to AAM's secured credit facility.
In addition to adding the term loan, the amended credit facility has also
increased the size of AAM's revolver to $523.5 million from $365 million,
shifted its maturity to 2018 from 2016, and reduced its pricing. In addition,
the facility's net priority leverage ratio covenant has loosened slightly,
with the covenant increased to 2.75x until March 31, 2015, followed by
step-downs to 2.5x on March 31, 2015 and 2.25x on March 31, 2016. This is
about one-quarter turn higher than the covenants in the prior version of the
facility.

AXL intends to use proceeds from the new term loan A to fund the redemption of
a portion of AAM's 9.25% senior secured notes due 2017, as well as for general
corporate purposes. As of June 30, 2013, $340 million in principal was
outstanding on the 9.25% notes.

KEY RATING DRIVERS

The ratings and Positive Outlook for AXL and AAM are supported by Fitch's
expectation that the drivetrain and driveline supplier's credit profile will
strengthen over the intermediate term, despite some deterioration over the
past year. AXL continues to benefit from strong pickup and sport-utility
vehicle (SUV) production at its two largest customers, General Motors Company
(GM) and Chrysler Group LLC (Chrysler), and the company's margins are rising
back toward their historical levels among the strongest in the U.S. auto
supply industry. Weakness in AXL's profitability and credit profile over the
past year was largely due to temporary factors, including production
inefficiencies tied to two new product programs, as well as incremental costs
tied to the closure of the company's Detroit Manufacturing Complex (DMC) and
Cheektowaga Manufacturing Facility (CKMF). The recovery rating of 'RR1' on the
new term loan A is based on its strong collateral coverage, including
virtually all of the assets of AXL and AAM, leading to recovery prospects of
90% or higher in a distressed scenario.

Looking ahead, Fitch views the increasing diversification of AXL's book of
business as a credit positive that will reduce the company's outsized reliance
on U.S. light truck production. Passenger car, crossover, and commercial
vehicle related programs comprise a growing portion of the company's revenue
base, while an expanding list of customers is reducing AXL's traditional
reliance on GM for the majority of its business. The latter includes an
increasing number of non-U.S. manufacturers as well, which will further
geographically diversify the company's book of business. AXL's backlog of new
business currently stands at $1.25 billion, 60% of which is for passenger car
and crossover programs and 40% for programs outside North America. By 2015,
AXL expects about half of its revenue to come from non-GM programs. It is
notable that AXL has largely avoided the weakness that other suppliers have
experienced in Europe, as only 3% the company's 2012 revenue was derived in
the region.

Despite its increasing revenue diversification, AXL's ratings will continue to
be weighed upon in the near term by its heavy exposure to GM's light truck
platform, although the significant progress AXL has made in reducing its cost
base places it in a better position today to withstand any future downturn in
light truck demand. Also, with the recent introduction of GM's redesigned
full-size pickups and the forthcoming introduction of its redesigned SUVs,
Fitch expects near-term demand for GM's full-size trucks and SUVs to remain
high, which will benefit AXL's profitability. AXL's ratings are also weighed
upon by risks associated with the large number of new programs currently
ramping up. Although Fitch views the increasing diversification as a credit
positive overall, there are risks associated with the start-up of new
programs.

AXL's leverage (debt/Fitch-calculated EBITDA) increased during the 12 months
ended June 30, 2013, to 4.8x from 3.4x in the year-earlier period on an
increase in debt and a decline in EBITDA. Overall, debt rose to $1.5 billion
from $1.2 billion while Fitch-calculated EBITDA declined to $322 million from
$347 million. Fitch expects leverage to improve meaningfully over the
intermediate term as the company looks for opportunities to reduce debt and as
EBITDA grows on higher business levels and stronger margins. Fitch expects
leverage to trend down toward the mid-3x range by year-end 2013 and
potentially below 3x by the end of 2014.

Free cash flow (FCF; calculated as net cash from operations less gross capital
expenditures) in the 12 months ended June 30, 2012, was a use of $403 million,
pressured by a number of non-recurring items. Going forward, Fitch expects FCF
to improve as new product programs gain traction and capital spending trends
down toward more typical levels once the company moves past the heaviest part
of its new business roll-out. Also, following $225 million in pension
contributions in 2012, AXL is not expected to have any meaningful required
pension contributions for the next several years, which will further bolster
FCF. For 2013, above-normal capital spending is likely to keep FCF for the
year modestly negative, but Fitch expects it to grow and turn positive in 2014
on higher production, improved margins and lower capital spending.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:

--Continued progress on diversifying the company's revenue base;

--Sustained positive free cash flow generation;

--A decline in leverage to the mid-3x range;

--Sustained EBITDA margins of 12% or higher.

Negative: The current Rating Outlook is Positive. As a result, Fitch does not
currently anticipate developments with a material likelihood, individually or
collectively, leading to a rating downgrade. However, the following
developments could lead Fitch to revise the Rating Outlook to Stable or
Negative, or downgrade the ratings:

--Significant production inefficiencies and associated cash burn tied to the
start-up of new programs;

--Lack of progress on meaningful leverage reduction;

--A shift in management's plans to strengthen the company's credit profile;

--An unexpected prolonged disruption in the production of GM's full-size
pickups and SUVs.

Applicable Criteria and Related Research:

-- Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Subsidiary Linkage (Aug. 5, 2013);

-- Evaluating Corporate Governance (Dec. 12, 2012);

-- Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
(Nov. 13, 2012).

Applicable Criteria and Related Research:

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

Evaluating Corporate Governance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=802178

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Contact:

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Mark A. Oline
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
 
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