Fitch Rates Delphi Automotive's Proposed Notes 'BBB'
The proposed notes will be fully guaranteed on a senior unsecured basis by the same subsidiaries that guarantee the senior unsecured notes and unsecured credit facility of DLPH's Delphi Corporation (Delphi) subsidiary, removing any structural subordination concerns. Proceeds from the proposed notes, along with proceeds from DLPH's recent issuance of EUR500 million in 1.6% senior unsecured notes due 2028, will be used fund the redemption of Delphi's $800 million in 5% senior unsecured notes due 2023.
KEY RATING DRIVERS
The ratings of DLPH and its Delphi subsidiary reflect the company's relatively strong credit profile, as it continues to leverage its market position in advanced automotive technologies and its low cost base to drive margins and free cash flow (FCF) that are high for the auto supply industry. The company's focus on electrical architecture, safety, and advanced powertrain technologies has put it at the forefront of important growth trends in the global auto industry. Fitch expects DLPH's strong business position in these growth technologies will continue to result in top-line growth exceeding the rate of underlying global vehicle production over the intermediate term. Although the company is highly acquisitive and deploys a substantial amount of its cash toward shareholder-friendly activities, it also maintains relatively conservative financial practices, including a long-term EBITDA leverage target of only 1.5x. Additional rating drivers include the company's relatively strong liquidity position, minor pension obligations, and a manageable debt maturity profile, all of which continue to provide it with significant financial flexibility.
Rating concerns continue to include the cyclical nature of the global auto industry, intense industry competition, potentially volatile raw material costs, and new entrants into the automotive technology sector. Mitigating these concerns are the diversification of DLPH's business across geographies, customers and products, as well as its flexible operating model, which has positioned much of the company's manufacturing capacity in low-cost countries. DLPH's strong supply position with most major global auto manufacturers is also a mitigant. Other concerns include the company's interest in acquisitions and its significant cash returns to shareholders, although its relatively strong FCF generating capability suggests that most of these activities will not drive a meaningful increase in long-term leverage. With its above-average financial flexibility, Fitch also expects DLPH would be able to perform better than most auto suppliers through an industry downturn.
Fitch expects DLPH's consolidated EBITDA leverage to remain near the company's 1.5x leverage target over the longer term, but it could temporarily rise at times when the company makes acquisitions, as it did with the 2015 acquisition of HellermanTyton Group PLC. Nonetheless, Fitch expects strong operating cash flow will generally provide it with sufficient flexibility to fund capital spending, dividends, share repurchases and smaller acquisitions without the need for significant incremental long-term borrowing. Fitch expects the company to produce relatively strong FCF over the intermediate term, with post-dividend FCF margins running in the mid-single-digit range. Fitch also expects DLPH to maintain around $500 million to $600 million in cash on its balance sheet over the intermediate term.
Fitch's key assumptions within its rating case for DLPH include:
--Low-single-digit global auto production growth over the intermediate term;
--DLPH's penetration rates increase, resulting in revenue rising at a faster rate than overall vehicle production;
--Capital spending runs at about 5% of revenue over the intermediate term;
--The common stock dividend rate rises over time, but total cash spent on dividends is about flat on a reduced share count;
--The company continues to make modest to moderately sized acquisitions from time to time;
--The company refinances its significant debt maturities over the intermediate term;
--The company maintains around $500 million to $600 million in cash on its balance sheet, with excess cash used for acquisitions or share repurchases.
Positive: Given DLPH's capital allocation strategy and leverage targets, Fitch does not anticipate an upgrade to DLPH's ratings in the intermediate term.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--An unexpected sharp decline in global auto production;
--A decline in the company's EBITDA margins to below 12%;
--A decline in the company's FCF margin to 3% or lower for a prolonged period;
--An increase in EBITDA leverage to above 1.5x for an extended period.
Fitch currently rates DLPH and Delphi as follows:
--Senior unsecured notes rating 'BBB'.
--Unsecured term loan rating 'BBB';
--Unsecured revolving credit facility rating 'BBB';
--Senior unsecured notes rating 'BBB'.
The Rating Outlook for both entities is Stable.