Fitch Rates Allison Transmission's Proposed Term B-4 Loan 'BB'
The proposed Term B-4 Loan will be incorporated into ATI's existing secured credit agreement via an amendment. The proposed loan will mature on Aug. 23, 2019, which is the same maturity date as ATI's existing \$1.8 billion Term B-3 Loan. Proceeds from the proposed Term B-4 Loan will be used to pay for the tender of ATI's \$471 million in 7.125% senior unsecured notes that was announced on March 18, 2015.
KEY RATING DRIVERS
The ratings for ALSN and ATI are supported by the company's strong competitive position in the global market for fully automatic transmissions for commercial, industrial and military vehicles and equipment. ALSN's market position in North America is very strong, with 95% of all school buses and 74% of Class 6 and 7 medium-duty commercial trucks manufactured with the company's transmissions in 2014. In addition, over half of the Class 8 straight trucks sold in North America in 2014 were manufactured with the company's transmissions, and unlike most Tier 1 suppliers, ALSN's brand name commands a price premium from end users. ALSN's market penetration outside North America is much smaller, as commercial vehicle end users in most global markets continue to choose manual transmission over automatics. However, acceptance of fully automatic transmissions for commercial truck applications is growing outside the U.S., particularly for certain vocational vehicles, such as city buses and emergency vehicles. This has been especially true in emerging markets like China and India, where ALSN is well positioned for future growth opportunities.
The secured revolver and term loans that make up ATI's credit facility, including the proposed Term B-4 Loan, are rated 'BB', one notch above ATI's IDR, due to their collateral coverage, which includes virtually all of ATI's assets. Fitch notes that property, plant, and equipment and intangible assets (including intellectual property) comprised \$2 billion of the \$4.8 billion in assets on ALSN's consolidated balance sheet at year-end 2014.
Rating risks include the heavy cyclicality of the global commercial vehicle and industrial end markets, volatile raw material costs, the relative lack of global diversification in ALSN's current business, moderately high leverage and a concentrated maturity schedule. However, on the last point, Fitch notes that credit facility amendments over the past several years have shifted all of ALSN's term loan obligations to 2017 and 2019, removing near-term refinancing risk but potentially creating challenges in later years. The company's strong profitability and free cash flow (FCF) generation place it in a relatively good position to manage industry cyclicality, and it is also notable that ALSN's transmissions are primarily used in the less-cyclical vocational truck market, rather than in the more cyclical Class 8 linehaul market where end users continue to prefer manual transmissions. Despite these strengths, a broad-based global downturn in commercial vehicle and off-road equipment production would pressure ASLN's profitability and FCF.
ALSN's credit profile is characterized by strong margins and FCF generation but moderately high leverage. Fitch-calculated leverage (debt/Fitch-calculated EBITDA) at year-end 2014, was 3.43x, with \$2.5 billion in debt and Fitch-calculated full-year EBITDA of \$735 million. The Fitch-calculated EBITDA margin, at 34.5%, remained very strong for a capital goods manufacturer and was up from 32.6% in 2013. Fitch expects leverage to trend down somewhat over the intermediate term through a combination of EBITDA growth and debt amortization. With strong FCF and virtually all of its debt in the form of secured term loans, ALSN has the financial flexibility to reduce leverage further in the intermediate term if it chooses to do so, although it ended 2014 within its net leverage target range, suggesting that in the near term, cash returns to shareholders will take priority over discretionary debt reduction. In 2014, ALSN paid \$92 million in common dividends and repurchased \$250 million of its common stock, and at year-end 2014, the company had \$500 million of share repurchase authorization remaining.
The company's liquidity position at year-end 2014 was more than sufficient to meet its near-term cash obligations and included \$263 million in cash and cash equivalents, augmented by \$455 million in availability on its \$465 million secured revolving credit facility (after accounting for \$9.9 million in letters of credit). Only \$35 million, or 13%, of the company's cash and cash equivalents was located outside the U.S. at year end 2014.
KEY ASSUMPTIONS
--Global commercial vehicle demand strengthens modestly over the intermediate term.
--ALSN continues to grow its emerging-market commercial vehicle penetration.
--Margins continue to grow over the intermediate term, primarily on higher production volumes.
--Capital spending equals a little over 3% of annual revenue over the next several years.
--The company uses share buybacks to regulate the level of cash on its balance sheet, maintaining a cash position of about \$150 million.
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--A decline in Fitch-calculated EBITDA leverage to below 3.5x;
--An increase in the global diversification of its revenue base;
--Maintaining EBITDA and FCF margins near current levels;
--Continued positive FCF generation in a weakened demand environment.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A sharp decline in commercial vehicle production, especially in North America that leads to significantly lower margins and FCF;
--An increase in leverage to above 4.5x for a prolonged period;
--A merger or acquisition that results in higher leverage or lower margins over an extended period;
--A competitive entry into the market that results in a significant market share loss.
Fitch currently rates ALSN and ATI as follows, with a Positive Outlook:
ALSN
--Long-term IDR of 'BB-';
ATI
--Long-term IDR of 'BB-';
--Secured revolving credit facility rating of 'BB';
--Secured term loan rating of 'BB';
--Senior unsecured notes rating of 'B+'.
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