Fitch Rates American Axle's Proposed Notes 'B/RR5'
CHICAGO -- November 5, 2013
Fitch Ratings has assigned a rating of 'B/RR5' to American Axle &
Manufacturing, Inc.'s (AAM) proposed $200 million in senior unsecured notes
due 2019. AAM is the principal operating subsidiary of American Axle &
Manufacturing Holdings, Inc. (AXL). Fitch's Issuer Default Rating (IDR) for
both AXL and AAM is 'B+' and the Rating Outlook for both is Positive.
The proposed notes will be guaranteed by AXL, as well as each of its
subsidiaries that also guarantee AAM's 6.25% 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. The company intends to use proceeds from the new notes to redeem the
remaining amount outstanding on its 9.25% senior secured notes due 2017.
In September 2013, AAM amended its secured credit facility. As part of the
amendment, the company added a $150 million Term Loan A to the facility,
proceeds of which were used to redeem a portion of the 9.25% secured notes.
Following the redemption, as of Nov. 1, 2013, $190 million in principal amount
of the 9.25% notes remained outstanding. Proceeds from the proposed notes
issuance will allow AAM to redeem in full the remaining amount of 9.25%
secured notes, reducing the amount of secured debt in the company's capital
structure and likely reducing interest expense, as well. After all of the
9.25% notes have been redeemed, the company will have no significant debt
maturing before September 2018, when the majority of Term Loan A comes due.
KEY RATING DRIVERS
The ratings and Positive Outlook for AXL and AAM continue to be supported by
Fitch's expectation that the company's credit profile will strengthen over the
intermediate term. AXL continues to benefit from strong light truck production
at General Motors Company (GM) and Chrysler Group LLC (Chrysler), and its
margins are rising back toward recent historical levels, which were among the
strongest in the U.S. auto supply industry. Over the past 18 months, the
company has dealt with several challenges, including production inefficiencies
tied to certain new-product programs, as well as incremental costs related to
the closure of two of the company's manufacturing complexes. The recovery
rating of 'RR5' on the proposed notes reflects the substantial amount of
secured debt in the company's capital structure, which Fitch estimates would
lead to recovery prospects in the 10% to 30% range for the notes in a
In November 2013, AXL lowered its three-year backlog of new business estimate
to $1 billion from $1.25 billion. The reduction was due to customer actions
that re-timed a portion of one program and reduced the planned requirements
for another one. About two-thirds of the remaining backlog pertains to
passenger car and crossover programs, and about two-thirds of the current
estimate relates to programs sourced from AXL's plants outside the U.S.
Overall, Fitch views this increasing diversification of AXL's book of business
as a credit positive, as it will reduce the company's heavy exposure to U.S.
light truck production and lessen its reliance on GM for the majority of its
revenue. By 2015, AXL expects that about half of its revenue will be derived
from non-GM programs.
Despite this increasing diversification, AXL's credit profile still faces some
near-term risk from the company's very heavy exposure to GM's light truck
platform, although the company's progress in reducing its cost base places it
in a better position today to withstand any potential future downturn. Also,
with the recent redesign of GM's full-size pickups and the upcoming
introduction of GM's redesigned full-size SUVs, demand for that platform is
likely to remain elevated over the medium term. In addition to platform
exposure, the large number of new programs coming on-line in the near term
also poses a risk to AXL's credit profile, as it raises the potential for
production issues that could lead to temporary inefficiencies and increased
costs. Fitch notes that AXL's margins have been pressured by startup issues on
several programs over the past year.
AXL's leverage (debt/Fitch-calculated EBITDA) declined during the 12 months
ended Sept. 30, 2013, to 4.2x from 4.7x in the year-earlier period.
Fitch-calculated EBITDA over the 12 months ended Sept. 30, 2013 rose to $373
million from $336 million, while debt was roughly flat at $1.6 billion. Fitch
expects leverage to decline further over the intermediate term as EBITDA grows
on higher business levels and somewhat stronger margins and the company looks
for opportunities to reduce its debt. Fitch expects leverage to trend down
toward the mid-3x range by year-end 2013 and potentially below 3x by the end
Free cash flow (FCF; calculated as net cash from operations less gross capital
expenditures) in the 12 months ended Sept. 30, 2013, was a use of $119
million, pressured by several non-recurring items. Going forward, Fitch
expects FCF to improve as new product programs gain traction and as capital
spending declines to more typical levels. 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
full-year FCF modestly negative, but Fitch expects it to grow and turn
positive in 2014 on higher production, improved margins and lower capital
Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:
--Continued progress in diversifying the company's revenue base;
--Sustained positive FCF 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 cash burn tied to the start-up of
--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.
Additional information is available at www.fitchratings.com.
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:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
Evaluating Corporate Governance
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
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Fitch Ratings, Inc., 70 West Madison Street, Chicago, IL 60602
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