NEW YORK--()--Fitch Ratings has assigned a rating of 'BBB-' to Delphi Corporation's (Delphi) proposed $800 million in senior unsecured notes due 2023. Delphi is a subsidiary of Delphi Automotive PLC (DLPH). The Issuer Default Rating for both DLPH and Delphi is 'BBB-'. The Rating Outlook is Stable.
The proposed notes will be guaranteed by DLPH and certain current and future subsidiaries that also guarantee Delphi's secured revolving credit facility and term loans. The guarantees will no longer be required if the notes are assigned investment-grade ratings from certain credit rating agencies. Delphi expects to use proceeds from the new notes to repay amounts outstanding under its secured term loans and for general corporate purposes. As of Dec. 31, 2012, Delphi had $567 million outstanding on its secured Term Loan A and $772 million outstanding on its secured Term Loan B.
KEY RATING DRIVERS
The ratings of DLPH and Delphi reflect the auto supplier's strong competitive position in the automotive electrical, infotainment, safety, powertrain and thermal arenas. The technologically advanced nature of many of its products and its low-cost manufacturing operations have resulted in relatively strong profitability and solid free cash flow over the past three years. This has been particularly evident over the past year, as the company posted an EBITDA margin of nearly 14% despite relatively weak conditions in several of its end markets. In addition, DLPH's product portfolio, which emphasizes safety, emissions and communications technologies, has positioned the company to take advantage of key growth trends in the auto industry. This will help to propel continued revenue growth in excess of the growth rate of underlying vehicle production. Other important rating drivers include DLPH's strong liquidity position, positive free cash flow generation, low leverage and limited pension obligations.
Concerns include the auto industry's highly cyclical nature, volatility in raw material costs, and DLPH's significant exposure to the European auto market. These concerns are mitigated somewhat by the company's increasing global penetration rates, which has helped to support sales in weaker markets. The company's flexible operating model, which has positioned much of its production capacity in low-cost countries, has also helped to support profitability in the face of slower vehicle production growth in key markets. Like a number of other global auto suppliers, another concern is the mismatch between the location of the company's debt and its revenue generation, with most of DLPH's revenue generated outside the U.S. but virtually all of its debt issued in the U.S. In the case of DLPH, this is currently less of an issue than it is with certain other suppliers, as its incorporation under the laws of Jersey reduces the tax cost of moving cash into the U.S. to support dollar-denominated obligations.
DLPH maintains a relatively strong credit profile. Leverage (debt/Fitch-calculated EBITDA) at year-end 2012 was 1.1x, with $2.5 billion in debt and full-year EBITDA (as calculated by Fitch) of $2.2 billion. Free cash flow for the year was $773 million, resulting in a free cash flow margin of 5%. Fitch expects free cash flow to remain solidly positive over the intermediate term as operating cash flow more than offsets any increases in capital spending. DLPH's public guidance calls for it to produce cash flow before financing in 2013 of $1 billion, including $750 million of capital spending. The company's liquidity at year-end 2012 included $1.1 billion in cash and marketable securities and $1.3 billion in availability on its secured revolver. Short-term debt and current maturities totaled only $140 million at year end, and the company has no significant debt maturities until 2016.
The Stable Rating Outlook on DLPH and Delphi indicates that a near-term change in the company's ratings is not likely. Longer term, Fitch could consider a positive rating action if leverage remains low and free cash flow and margins remain strong for an extended period. On the other hand, Fitch could consider a negative rating action if global auto production declines sharply or if the company undertakes a large, debt-financed acquisition. A significant increase in long-term debt to support shareholder-friendly actions would also be viewed negatively by Fitch, although share repurchases or dividends funded through operating cash flow could be consistent with the ratings, provided the company maintains sufficient liquidity to fund its operations through the cycle.
Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012);
--'2013 Outlook: U.S. Auto Manufacturers and Suppliers' (Dec. 17, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance
2013 Outlook: U.S. Auto Manufacturers and Suppliers