Fitch Rates Delphi Automotive's Proposed Notes 'BBB'
The proposed notes will be issued by DLPH, whereas the company's existing senior unsecured notes have been issued by Delphi Corporation (Delphi), a subsidiary of DLPH. However, the proposed notes will be fully guaranteed on a senior unsecured basis by the same subsidiaries that guarantee Delphi's notes and Delphi's unsecured credit facility, removing any structural subordination that the proposed notes would otherwise have in relation to Delphi's existing notes.
Proceeds from the proposed notes will be used for general corporate purposes, including the redemption of Delphi's existing 2021 notes. Fitch notes that the euro-denominated issue is likely to bear substantially lower interest than the 6.125% interest on Delphi's existing 2021 notes. Also, by issuing in euros, DLPH is better able to match its debt to its cash flows, as 38% of the company's 2014 revenue was generated in Europe, Middle East and Africa.
KEY RATING DRIVERS
Fitch recently upgraded DLPH's IDR to 'BBB' from 'BBB-', reflecting the company's strengthening credit profile. DLPH has successfully 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. The recently announced divestiture of DLPH's thermal systems business will further focus the company's business on its higher-margin growth segments.
Despite its significant dividends and share repurchase activities, the company adheres to fairly conservative financial practices, including targeting leverage at only 1.5x over the long term. Other credit strengths include a strong liquidity position, minor pension obligations, and a manageable debt maturity profile, all of which provide it with significant financial flexibility.
Rating risks include the cyclical nature of the global auto industry, the industry's intense competition and potentially volatile raw material costs. Mitigating these risks 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 risks 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 end-2014 was only 0.9x, with USD2.5bn in debt and full-year EBITDA of USD2.7bn. Funds from operations (FFO) adjusted gross leverage was 1.5x at end-2014.
DLPH's liquidity position is strong, including USD904m in cash and cash equivalents and nearly full availability on a USD1.5bn unsecured revolver at end-2014, and it has no significant debt maturities until 2018, when the remaining USD400m of its term loan A matures.
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.
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 USD1bn 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 FCF margin to 3% or lower for a prolonged period
-An increase in EBITDA leverage to above 1.5x for an extended period
DLPH's and Delphi's ratings are as follows:
DLPH
-IDR at 'BBB'; Stable Outlook
-Senior unsecured notes rating at 'BBB'
Delphi
-IDR at 'BBB'; Stable Outlook
-Unsecured term loan rating at 'BBB'
-Unsecured revolving credit facility rating at 'BBB'
-Senior unsecured notes rating at 'BBB'
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