OREANDA-NEWS. Fitch Ratings has assigned BorgWarner Inc.'s (BWA; BBB+/Stable) proposed EUR500m issuance of seven-year senior unsecured notes a 'BBB+' rating.

Proceeds from the proposed notes will be used for general corporate purposes. Fitch expects they will be primarily used to fund a portion of BWA's acquisition of Remy International, Inc. (REMY). BWA expects to close the REMY acquisition in 4Q15, and recently noted that it may close as soon as the first half of November. BWA's acquisition of REMY has an implied enterprise value of approximately USD1.3bn including net debt. In addition to proceeds from the proposed notes, Fitch expects BWA to fund much of the remainder of the transaction with cash on hand. As of 30 September 2015, BWA had about USD1bn in cash on its balance sheet, including USD673m located outside the U.S.

By issuing in euros, the proposed notes pricing will likely be substantially lower than it would be for a U.S. dollar-denominated issuance. The euro issuance also means BWA will better match its debt to its cash flows, as 50% of the company's 2014 revenue was generated in Europe.

KEY RATING DRIVERS
BWA's ratings are supported by the company's strong competitive position as a key global supplier of engine and drivetrain components, significant free cash flow (FCF) generation potential, solid consolidated liquidity position and relatively low leverage. BWA managed through the last economic downturn relatively well, and with a product portfolio largely focused on technologies that enhance fuel efficiency, such as turbochargers and dual-clutch transmission components, its sales growth is likely to continue outpacing global auto production over the intermediate term. In addition, efficient capacity utilisation and a focus on cost control have resulted in profitability that is high for the industry, contributing to strong FCF generation and providing the company with significant financial flexibility.

The REMY acquisition will allow BWA to offer more comprehensive end-to-end powertrain systems, which Fitch expects will result in longer-term product synergies. BWA expects to achieve at least USD15m in synergies from the acquisition, mostly related to purchasing efficiencies and eliminating redundant public company expenses, which suggests the figure is conservative. REMY will also diversify BWA's powertrain offerings, which Fitch views positively. Fitch believes that over the longer term, the acquisition will significantly enhance BWA's exposure to the growing electric and hybrid vehicle segments.

Fitch's perceives there are risks around BWA's ongoing interest in acquisitions and its heightened focus on shareholder-friendly activities. Earlier this year, BWA announced a USD1bn three-year share repurchase programme, funded in part with incremental leverage, and Fitch expects the company to continue repurchasing shares following the REMY acquisition. The company has also paid a common stock dividend since mid-2013. Fitch believes the risks regarding cash returns to shareholders are mitigated somewhat by the company's strong profitability and consistently positive FCF generation.

Pro-forma for the acquisition and the proposed notes issuance, BWA's leverage will rise. However, Fitch expects leverage to decline to the lower-1x range over the next two years. Supporting that expectation, BWA's net debt to net capitalisation will likely exceed 30% following the closing of the transaction, above the high end of its targeted range, suggesting that a reduction in net debt will be a priority for the company following the closing of the acquisition.

KEY ASSUMPTIONS
--Global economic conditions continue to improve at a modest pace over the intermediate term, leading to low- to mid-single digit growth in global auto production.
--In the near term, foreign exchange pressure from the strong U.S. dollar more than offsets revenue growth from higher business levels.
--The company funds the REMY acquisition with a combination of cash on hand and incremental debt.
--Maturing debt obligations are refinanced.
--Capital spending is elevated in 2015, and then falls to more normalised levels in subsequent years.
--Dividends grow on an annual basis.
--FCF is used to fund acquisitions or share repurchases.
--The company maintains about USD700m in cash on its balance sheet over the intermediate term.

RATING SENSITIVITIES
Positive: Given BWA's 'BBB+' IDR, a near-term upgrade of the company's ratings is unlikely. Typically, the inherent cyclicality and potential financial pressures of the auto supply industry result in a soft cap on IDRs at the 'BBB+' level, although in rare cases a supplier with a very strong business profile and unusually strong credit protection metrics could be considered for the 'A' category.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--An unexpected sharp drop in global auto production.
--An increase in leverage to above 1.5x for an extended period.
--A decline in the company's EBITDA margin to below 12%.
--A significant increase in long-term debt to support shareholder-friendly actions.

Fitch currently rates BWA as follows:

--Long-term IDR 'BBB+'; Outlook Stable
--Short-term IDR 'F2'
--Unsecured revolving credit facility 'BBB+'
--Senior unsecured notes 'BBB+'
--CP programme 'F2'.