Fitch Affirms Delphi's Ratings Following HellermannTyton Acquisition Announcement
Fitch has also affirmed DLPH's senior unsecured notes and Delphi's unsecured revolving credit facility, unsecured term loan, and senior unsecured notes ratings at 'BBB'. A complete list of the ratings is provided at the end of this release. The Rating Outlook for DLPH is Stable.
KEY RATING DRIVERS
DLPH's acquisition of HTY will be an all-cash transaction that places an enterprise value of \\$1.85 billion on HTY. Fitch estimates that the enterprise value equates to a multiple of about 13x HTY's 2014 EBITDA or about 9x HTY's estimated 2015 EBITDA plus \\$50 million in estimated annual synergies that DLPH hopes to achieve by the end of 2018. HTY is currently a supplier to DLPH, and in many respects the transaction can be considered a large bolt-on acquisition. In addition to increasing DLPH's vertical integration in the electrical architecture segment, HTY will significantly strengthen DLPH's position in cable management systems and application tooling and service. It will also enhance DLPH's global distribution network and diversify its customer base, as about half of HTY's revenue is generated outside the auto industry. DLPH expects the transaction to close in the fourth quarter of 2015.
Overall, Fitch views the HTY acquisition positively, as it will further strengthen DLPH's presence in the growing automotive electrical architecture arena, and HTY's strong margins, which are higher than DLPH's existing margins, will enhance DLPH's overall profitability even before the projected synergies are achieved. Fitch also views the transaction as relatively low risk, given DLPH's existing experience with HTY and its products. Fitch does not expect the transaction to raise any significant regulatory concerns. However, the increase in leverage following this transaction will reduce some of the cushion in DLPH's ratings in the event of an unexpected downturn.
DLPH plans to fund the acquisition through a combination of cash on-hand and incremental debt. Specifically, the company plans to use \\$660 million in cash and borrow the remaining \\$1.2 billion. As a U.K.-domiciled company, DLPH has flexibility to move cash into the U.K., if needed, to fund the transaction without incurring taxes on the remitted earnings. Although DLPH has a GBP550 million bridge facility in place and could borrow on its revolver, Fitch expects the company could seek to issue long-term debt to fund the \\$1.2 billion debt-funded portion of the acquisition before the transaction closes.
Although the addition of \\$1.2 billion in incremental long-term debt to the company's existing \\$2.7 billion in debt outstanding will significantly increase DLPH's consolidated debt level, Fitch expects pro forma leverage to rise only to the mid-1x range, which would be consistent with DLPH's 'BBB' IDR. Fitch noted when it upgraded DLPH's IDR to 'BBB' from 'BBB-' in February 2015 that the IDR was based, in part, on DLPH's target leverage of 1.5x, rather than its actual leverage at the time, which was only 0.9x.
Outside of the acquisition, other elements of DLPH's credit profile remain largely intact. It maintains strong market positions in the electrical, infotainment, safety and powertrain product categories. In addition, its focus on safety, emissions and communications technologies takes advantage of important growth trends in the global auto industry, and Fitch expects revenue will generally grow above the rate of underlying global vehicle production over the intermediate term. The high-technology nature of many of DLPH's products and its low-cost manufacturing footprint continue to drive margins and free cash flow (FCF) that are high for the auto supply industry, resulting in relatively strong financial flexibility. In addition, although DLPH has recently targeted a substantial amount of cash toward shareholder-friendly activities, including substantial share repurchases, the company's financial practices are relatively conservative, including its 1.5x leverage target. Other drivers of DLPH's ratings include its strong liquidity position, minor pension obligations, and a manageable debt maturity profile.
Fitch's 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. Furthermore, due to its financial flexibility, Fitch expects DLPH would be able to perform better through an industry downturn than the typical auto supplier.
KEY ASSUMPTIONS
--The HTY acquisition closes in the fourth quarter of 2015;
--The company funds the acquisition with \\$660 million in cash and \\$1.2 billion of debt;
--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;
--Annual FCF in the \\$700 million to \\$800 million range, equating to a FCF margin of 4% to 5%;
--The company refinances its significant debt maturities over the intermediate term;
--The company maintains roughly \\$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 affirmed the following ratings with a Stable Rating Outlook:
DLPH
--IDR at 'BBB';
--Senior unsecured notes rating at 'BBB'.
Delphi
--IDR at 'BBB';
--Unsecured term loan rating at 'BBB';
--Unsecured revolving credit facility rating at 'BBB';
--Senior unsecured notes rating at 'BBB'.
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