New York, November 14, 2012 -- Moody's Investors Service assigned first time ratings to UC Holdings, Inc. - Corporate Family Rating at B3, and Probability of Default Rating at B3. In a related action, Moody's assigned a B3 rating to the new $237 million senior secured term loan. UC Holdings, Inc. is a newly created parent holding company which will comprise the operations of Diversified Machine Inc. (DMI) and Concord International, Inc. (operating as SMW Automotive). The new term loan, along with partial funding under a new $100 million asset based revolving credit facility (unrated), will be used to repay the existing bank debt at Diversified Machine and Concord International. The rating outlook is stable.
DMI and Concord manufacture, cast, machine and assemble fully-engineered chassis and powertrain components and modules for leading automotive OEMs and Tier 1 suppliers. Affiliates of Platinum Equity Advisors, LLC purchased Concord in January 2012. The current transaction integrates the operations of DMI and Concord under the new parent holding company in order take advantage of certain synergistic opportunities that exist between the companies.
The following ratings were assigned:
UC Holdings, Inc.: Corporate Family Rating, B3; Probability of Default, B3. Diversified Machine, Inc. (with Concord International, Inc. and certain other UC Holdings, Inc. subsidiaries as co-borrowers):
B3 (LGD4, 53%) to the $237 million senior secured term loan facility;
The $100 million asset based revolving credit facility is not rated by Moody's.
UC Holdings, Inc.'s B3 Corporate Family Rating (CFR) reflects the ongoing challenges the company faces as it takes actions to correct underperforming operations at one of DMI's facilities, and initiates additional synergistic programs at DMI and Concord to optimize manufacturing footprint, overhead, global purchasing, and in-sourcing of Concord's casting products. These challenges are partially mitigated by stronger operating performance and additional asset coverage the Concord business brings to the combined companies. While on a pro forma basis management approximates Debt/EBITDA at about 3.3x, the pro forma adjustments include certain expected run-rate assumptions and other adjustments which Moody's believes need to be demonstrated in the company's performance over the near-term.
Moody's anticipates that the transaction will result in a stronger competitive position within the automotive casting industry for the combined operations of DMI and Concord. UC Holdings' products are found on leading automotive platforms. While UC Holdings' geographic reach is limited with the vast majority of revenues generated in North America, this region is currently experiencing stronger growth compared to other geographies. Yet, UC Holdings will continue to maintain high customer concentrations with revenues to the North American operations of the Detroit-3, exposing the company to the market share risk of these OEMs.
The stable rating outlook reflects the additional profitability and operational flexibility Concord brings to DMI's operations and potential synergies to be implemented through the combined operations to support stronger profitability.
UC Holdings is expected to have an adequate liquidity profile over the next twelve months supported by the new $100 million asset based revolving credit facility, and anticipated financial covenant headroom under the new term loan facility. Borrowings under the asset based revolver at closing are estimated to be about $25 million, leaving the remaining unfunded commitment of about $75 million available, based on expected borrowing base calculations. The primary financial covenant under revolver will be a springing fixed charge coverage ratio of 1.0x when availability falls below the greater of 10% of commitments or $7.5 million for five consecutive days. The financial covenants under the term loan are expected to include a maximum total leverage ratio and a minimum interest coverage ratio; both are expected to have sufficient covenant cushion over the near-term. Moody's believes UC Holdings will continue to execute actions to correct operating inefficiencies at its DMI operations and execute programs to drive synergies between the DMI and Concord operations. These actions are expected to use cash over the near-term driving higher revolver usage until their operating benefits are realized.
The outlook or rating could improve if UC Holdings successfully demonstrates that the manufacturing issues at certain of DMI facilities have been cured and the implementation of synergy programs result in improving profit margins while generating positive free cash flow. A positive rating action could result if, absent pro forma adjustments, EBIT margin improves above 6% on an LTM basis, debt/EBITDA is sustained below 4x, and EBIT/Interest approaches 2x.
The outlook or rating could be lowered if UC Holdings' cost improvement actions do not demonstrate a return of operating performance where EBIT margins approach 5%, if North American automotive demand deteriorates resulting in EBIT/interest below 1.5x or Debt/EBITDA above 5x, or a deterioration in liquidity.
UC Holdings, Inc. is the parent holding company for the combined operations of Diversified Machine, Inc. (DMI) and Concord International, Inc. DMI and Concord manufacture, cast, machine and assemble fully-engineered chassis and powertrain components and modules for leading automotive OEMs and Tier 1 suppliers. UC Holdings, Inc. is a wholly-owned subsidiary of affiliates of Platinum Equity Advisors, LLC.
The principal methodology used in rating UC Holdings, Inc. was the Global Automotive Supplier Industry Methodology published in January 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
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