New York, November 16, 2012 -- Moody's Investors Service assigned ratings to new Metaldyne, LLC ("Metaldyne") -- Corporate Family Rating at B1 and Probability of Default Rating at B2. In a related action, a B1 rating was assigned to the new $620 million of senior secured bank credit facilities. The rating assignment follows Metaldyne's announcement that it has entered into a definitive agreement to be acquired by an affiliate of American Securities LLC for $820 million plus related expenses. Funding for transaction is expected to include a $545 million senior secured term loan, the rollover of certain existing debt, and $296.5 million of equity. The rating outlook is stable.
The following ratings were assigned:
Corporate Family Rating, B1;
Probability of Default Rating, B2;
B1 (LGD3, 30%), for the $75 million senior secured revolving credit facility;
B1 (LGD3, 30%), for the $545 million senior secured term loan.
Metaldyne's B1 Corporate Family Rating reflects the company's high debt burden resulting from the new secured term loan (a $176 million increase from the existing term loan) to be used to support the company's purchase by American Securities, balanced by the company's improving profit margins as the automotive industry recovers. Pro forma for the transaction, Metaldyne's debt/EBITDA is expected to approximate 3.6x (including Moody's standard adjustments), or an increase of about 1.0x times resulting from the buy-out. Yet, Metaldyne's profit margins have benefited from rising automotive production, particularly in North America (about 50% of revenues), resulting in EBIT margins increasing to 13% (including Moody's standard adjustments) for the LTM period ending September 23, 2012, compared to 8.9% in fiscal 2010. Moody's expects Metaldyne's competitive position as a supplier of powertrain products will be maintained over the intermediate-term and will continue to support strong profit margins. Further, the B1 rating recognizes that while about 40% of Metaldyne's revenues are generated in economically stressed Europe, it benefits from about half of these revenues being positioned with stronger German OEMs which are expected to be impacted less severely than southern European OEMs.
The stable rating outlook incorporates Moody's belief that Metaldyne's credit metrics will support the assigned rating over the intermediate term.
Metaldyne is anticipated to maintain an adequate liquidity profile over the near-term following the transaction, supported by cash on hand and free cash flow generation, estimated at about 11% of debt on a pro forma basis. The company is expected to have about $30 million of cash on hand following the close of the transaction. Further supporting liquidity is Metaldyne's demonstrated ability to generate positive free cash flow over the recent years, before special dividends. Moody's expects this trend to continue over the intermediate-term. Metaldyne's use of its accounts receivable factoring program continues to pose a potential risk given that this program might not be renewed on a timely basis. Metaldyne's new $75 million revolving credit facility (a $35 million increase over the existing level) is expected to be unfunded at close and should remain largely unused over the near-term other than supporting a modest amount of letters of credit. The primary financial covenant under the secured credit facilities is expected be a maximum net leverage ratio with initial ample cushion.
Metaldyne's rating or outlook could improve from continued improvement in revenues, and operating performance resulting in debt/EBITDA at 3.0x on a sustained basis and EBIT/interest coverage sustained above 3.5x.
The outlook or rating could be lowered if North American production declines or if European automotive production levels deteriorate more rapidly than recent trends, resulting in weaker profitability or a deterioration in liquidity. The outlook or rating could be lowered if Debt/EBITDA were to approach 4.5x, if free cash flow generation is not realized, or if shareholder distributions are made resulting in leverage approaching the above thresholds.
The principal methodology used in rating Metaldyne 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.
Metaldyne, LLC is a leading global manufacturer of highly engineered metal-based components for light vehicle engine, transmission and driveline applications for the global automotive light vehicle market. The company is a wholly-owned subsidiary of MD Investors Corporation which itself will be owned by affiliates of American Securities. Revenues for 2011 approximated $1 billion.
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