Fitch Rates American Axle's New Notes 'B-/RR6'

Tools

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'B-/RR6' to American Axle & Manufacturing, Inc.'s (AAM) $200 million of new senior unsecured notes due 2019. AAM is the principal operating subsidiary of American Axle & Manufacturing Holdings, Inc. (AXL). The issuer default rating (IDR) for both AAM and AXL is 'B+' and the Rating Outlook for both is Stable. The Recovery Rating of 'RR6' on AAM's new senior unsecured notes reflects estimated recovery prospects in the 0% to 10% range in a distressed scenario.

The new notes rank pari passu with AAM's existing senior unsecured notes. However, unlike the existing senior unsecured notes, the new notes are guaranteed by AAM's domestic subsidiaries that also guarantee its $375 million secured revolving credit facility and its $383 million (face value) of 9.25% senior secured notes. Fitch has reviewed the ratings implications of the guarantees on the new notes and, although the guarantees could provide some additional protection to bondholders in a default, Fitch does not view the additional protection as material enough at this time to warrant a rating differential between the new notes the existing senior unsecured notes. This is due primarily to the significant amount of secured debt in the company's capital structure (guaranteed by the same subsidiaries that guarantee the new notes), including both the secured credit facility and the secured notes, that would have priority over the new senior unsecured notes in a default.

Proceeds from the new senior unsecured notes will be used for general corporate purposes and will provide the company with additional cash liquidity following the termination of its Settlement and Commercial Agreement with General Motors Company (GM) on June 30, 2011. The Settlement and Commercial Agreement had provided AAM with a $100 million second-lien term loan facility that was undrawn at the time the agreement was terminated. The agreement also provided for expedited 'net 10 days' payments on receivables from GM. With the termination of the GM agreement, payments on GM receivables have transitioned to payment terms of about 50 days. This change in GM's payment terms had a $190 million negative effect on the company's consolidated operating cash flow in the third quarter of 2011 (3Q'11).

The IDRs for AXL and AAM reflect the company's strengthening credit profile as global light vehicle production volumes have risen. In addition, the company continues to diversify its revenue base away from a reliance on light truck production at GM and Chrysler Group LLC, and its new business backlog is more heavily weighted toward cars and crossover vehicles than traditional light trucks. Despite this increasing diversification that will take place over the longer term, AXL's financial performance will continue to be highly dependent upon U.S. light truck production in the near term, which remains a risk with volatility in fuel prices. Nonetheless, the company significantly reduced its cost structure during the recession and is in a stronger position today than it was prior to the recession to withstand any potential downturn in near-term light truck demand.

An increase in Fitch-calculated EBITDA and a modest increase in debt led to an improvement in AXL's credit protection metrics in the 12 months ended Sep. 30, 2011. Leverage (debt/EBITDA) stood at 2.8 times (x), down from 3.2x at Sep. 30, 2010, while EBITDA interest coverage was 4.3x, up from 3.2x one year earlier. Total liquidity at Sep. 30, 2011, stood at $389 million, including $114 million of cash and cash equivalents and $275 million of secured revolving credit facility availability. Credit facility availability was positively affected by an amendment and restatement of the facility that was entered into on June 30, 2011, that, among other changes, increased the total size of the facility to $375 million from $296 million. As of Sep. 30, 2011, AXL had borrowed $70 million on the facility and issued $30 million of standby letters of credit backed it, which reduced its availability to the $275 million noted above. With the termination of the GM Settlement and Commercial Agreement, access to the undrawn $100 million second-lien term loan facility that had been provided by GM as part of that agreement also was terminated. Previously, the GM second-lien term loan had been included in Fitch's calculation of AXL's liquidity. The company has no debt maturities coming due in the next 12 months.

The most significant risk to AXL's credit profile in the near term is the potential for a substantial slowing (or reversal) of the global economic recovery. However, this risk is offset somewhat by the company's increasingly diverse customer base and lower cost structure, both of which have positioned AXL to better withstand another downturn in the auto market. Also, a lack of meaningful debt maturities until 2014 helps to mitigate liquidity risk over the next several years. Another meaningful concern in the near term is volatile fuel prices, which could slow the growth rate of light truck sales when fuel prices rise again. Over 80% of AXL's revenue in 2010 was derived from light truck production, although that figure appears to have declined somewhat this year with increased customer and platform diversification. Nonetheless, pickup and sport utility vehicle sales have remained relatively good in 2011, and baseline light truck demand appears solid over the intermediate term.

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. 12, 2011);

-- 'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (May 12, 2011);

-- 'Evaluating Corporate Governance' (Dec. 16, 2010).

Applicable Criteria and Related Research:

Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628489

Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=581405

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

CONTACT:

Fitch Inc.
Primary Analyst
Stephen Brown, +1-312-368-3139
Senior Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Mark Sadeghian, CFA, +1-312-368-2090
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com