OREANDA-NEWS. February 16, 2015. Fitch Ratings has upgraded the Issuer Default Ratings (IDRs) of Delphi Automotive PLC (DLPH) and its Delphi Corporation (Delphi) subsidiary to 'BBB' from 'BBB-'. Fitch has also upgraded Delphi's unsecured term loan, unsecured revolving credit facility, and unsecured notes ratings to 'BBB' from 'BBB-'. A full list of the ratings is included at the end of this release. Fitch's ratings apply to a \\$400 million unsecured term loan A, a \\$1.5 billion unsecured revolving credit facility and \\$2 billion in senior unsecured notes. The Rating Outlooks for DLPH and Delphi are Stable.

KEY RATING DRIVERS

The upgrade to DLPH's ratings reflects the further strengthening of the company's credit profile as it has leveraged its market position in advanced automotive technologies and its low cost base to drive margins and free cash flow (FCF) that are high for the auto supply industry. The company's focus on safety, emissions and communications technologies takes advantage of important growth trends in the global auto industry, and Fitch expects revenue will grow above the rate of underlying global vehicle production over the intermediate term. Although the company has devoted a substantial amount of cash toward shareholder-friendly activities, it maintains relatively conservative financial practices, including targeting leverage at only 1.5x over the long term. Additional drivers of the upgrade include the company's strong liquidity position, minor pension obligations, and a manageable debt maturity profile, all of which provide it with significant financial flexibility.

Rating concerns include the cyclical nature of the global auto industry, the industry's intense competition and potentially volatile raw material costs. Mitigating these concerns are the diversification of DLPH's business across geographies, customers and products, and its flexible operating model, which has positioned much of the company's manufacturing capacity in low-cost countries. Other concerns include the company's acquisitive nature and its significant cash returns to shareholders, although its strong cash position and FCF generation suggest that most of these activities will not drive a meaningful increase in leverage, at least not beyond its 1.5x target. With its financial flexibility, Fitch expects DLPH would be able to perform better through an industry downturn than the typical auto supplier.

DLPH's credit profile is strong for the auto supply sector. EBITDA leverage (debt/Fitch-calculated EBITDA) at year-end 2014 was only 0.9x, with \\$2.5 billion in debt and full-year EBITDA of \\$2.7 billion. Funds from operations (FFO) adjusted leverage was 1.5x at year-end 2014. The company's liquidity position is strong and included \\$904 million in cash and cash equivalents and nearly full availability on its \\$1.5 billion unsecured revolver. Short-term debt and current maturities amounted to only \\$34 million and the company has no significant debt maturities until 2018, when the remaining \\$400 million of its term loan A matures. Going forward, Fitch expects leverage to remain low, but it could rise somewhat as leverage is currently below the company's target level. Nonetheless, Fitch expects continued strong operating cash flow will provide DLPH with sufficient flexibility to fund capital spending, dividends, share repurchases and potential acquisitions without the need for significant incremental long-term borrowing.

Fitch views DLPH capital allocation strategy, which prioritizes investment before shareholder-friendly activities, as disciplined and relatively conservative. According to the strategy, the company deploys its FCF first toward acquisitions and then to share repurchases. In 2014, DLPH spent \\$350 million on acquisitions and bought back \\$1 billion of its common stock. Although the total amount spent on these activities exceeded FCF by \\$468 million, debt increased by only \\$39 million, and the company's year-end 2014 cash and cash equivalents balance of \\$904 million remained relatively strong. Going forward, Fitch expects DLPH will generally view cash deployment as a trade-off between acquisitions and share repurchases, with higher repurchase activity when acquisition spending is low and vice-versa. Fitch expects the company to maintain between \\$700 million and \\$1 billion in cash on its balance sheet over the intermediate term.

FCF in 2014 was strong at \\$906 million, up from \\$802 million in 2013, despite a \\$90 million increase in common dividends. The resulting FCF margin in 2014 was 5.3%, a relatively high margin for an auto supplier. Funds flow from operations (FFO) was a robust \\$2 billion (including minority dividends paid) in 2014, while working capital added a modest \\$14 million to the company's operating cash flow and capital expenditures totaled \\$855 million. Fitch expects DLPH to produce relatively strong FCF over the intermediate term despite an expected rise in capital spending, potentially higher dividend spending and some foreign exchange headwinds.

Similar to many other large U.S. auto suppliers, most of DLPH's debt has been issued in the U.S., while nearly two-thirds of the company's revenue is derived outside the U.S. Although this creates a mismatch between the source of the company's cash and its debt obligations, Fitch believes that DLPH has sufficient financial flexibility to meet its debt obligations. Notably, because DLPH is a U.K. resident taxpayer organized under the laws of Jersey, the tax consequences of transferring cash into the U.S. to service its obligations are lower than for U.S. resident companies. Fitch notes, however, that the U.S. Internal Revenue Service (IRS) has challenged the company's status as a non-U.S. corporation for U.S. tax purposes. If the IRS successfully asserts that DLPH should be treated as a U.S. resident taxpayer, the company's tax rate will rise, but the geographical mix of the company's operations suggests that its tax rate will remain relatively low, likely in the low 20% range.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for DLPH include:

--Low- to mid-single digit global auto production growth over the intermediate term;
--An increase in DLPH's penetration rates, resulting in revenue rising at a faster rate than overall vehicle production;
--Capital spending equal to between 5% and 6% of revenue over the intermediate term;
--Annual increases in common stock dividends;
--The company refinances its significant debt maturities over the intermediate term;
--The company maintains around \\$1 billion in cash on its balance sheet, with excess cash used for acquisitions or share repurchases.

RATING SENSITIVITIES

Positive: Given DLPH's capital allocation strategy and leverage targets, Fitch does not anticipate an upgrade to DLPH's ratings in the intermediate term.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--An unexpected sharp decline in global auto production;
--A decline in the company's EBITDA margins to below 12%;
--A decline in the company's free cash flow margin to 3% or lower for a prolonged period;
--An increase in EBITDA leverage to above 1.5x for an extended period.

Fitch has upgraded the following ratings of DLPH and Delphi with a Stable Rating Outlook.

DLPH
--IDR to 'BBB' from 'BBB-'.

Delphi
--IDR to 'BBB' from 'BBB-'
--Unsecured term loan rating to 'BBB' from 'BBB-';
--Unsecured revolving credit facility rating to 'BBB' from 'BBB-';
--Senior unsecured notes rating to 'BBB' from 'BBB-'.