S&P: JAC Holding Corp. Outlook Revised To Stable From Negative On Stronger-Than-Expected Revenue Growth, 'B' Rating Affirmed
At the same time, we raised our issue-level rating on the company's $150 million ($133.6 million outstanding) senior secured notes to 'B+' from 'B' and revised our recovery rating on the notes to '2' from '3'. The '2' recovery rating indicates our expectation for substantial recovery (70%-90%; lower half of the range) for the noteholders in the event of a payment default.
JAC supplies roof-rack systems to the highly competitive and cyclical U. S. and European auto industries. Our assessment of the company's business position reflects the narrow scope of its product portfolio, as sales of the company's roof-rack products made up about 82% of its revenue in 2015. Although the company's market share in this niche North American market is strong at 65%, it competes against some larger companies such as Magna and Aisin Seiki that have significantly more resources available to invest in product design. Although JAC has developed related product categories that include cargo management, step rails, and aluminum door extrusions, roof racks are still expected to account for 80% or more of the company's revenue over the near term.
We expect JAC's geographic concentration to remain high, with 90% of its sales coming from North America and only 10% coming from Europe. Nonetheless, the company has some slight end-market diversity because its sales are split between the automakers (85%) and the aftermarket (15%). JAC's customer diversity is moderate, as Toyota and Ford together represent its largest customer concentration at about 42% of total sales. In recent years, the company sales have benefited from strong consumer demand for sport utility vehicles (SUVs) and crossover utility vehicles (CUVs), which either include a roof rack by default or as an option. Though these particular vehicle categories are more prone to industry cyclicality, JAC has benefited from the increasing consumer demand for these vehicles during this period of low global oil prices.
The company has also been able to get the automakers to include its offerings on some large product launches, which has helped it increase the amount of content it sells per vehicle. While we expect that the company will increase its sales by gradually diversifying into new adjacent categories such as cargo management, we believe that these new revenue streams will not likely be material enough to alter our view of its business risk profile, at least over the next two years. JAC is also constructing a new facility in China to expand its presence in the region, though it will be a few years before its operations there add to its profitability.
Our assessment of the company's financial risk profile incorporates our expectation that JAC's financial policies will remain aggressive, given its majority ownership by a financial sponsor (which will likely preclude any significant debt reduction). The company's credit metrics have improved over the last year, as its debt-to-EBITDA metric has declined and its free operating cash flow (FOCF)-to-debt ratio has risen, though we continue to believe that its cash flow/leverage ratios are close to their peak levels and will likely worsen during periods of stress due to the company's exposure to highly cyclical truck volumes.
Our base-case scenario assumes the following:U. S. real GDP growth of 2.0% in 2016 and 2.4% in 2017;Based on LMC Automotive's forecasts, North American light vehicle production (which accounts for over 90% of JAC's sales) will increase by 1.2% in 2017 after growing by 2.9% in 2016. Western European light-vehicle production will increase by about 3.5% in 2016 and by about 0.6% in 2017, year-over-year;Going forward, JAC's revenue will likely increase at a slow pace that is directionally consistent with our production forecasts;We believe that the company could maintain EBITDA margins in the 14%-16% range over the next two years if it can continue to counter the ongoing customer price-downs with cost-efficiency improvements and new value-added content;Expected capital expenditures (capex) of $10 million-$11 million, on average, annually;No material acquisitions in 2016-2018; andNo dividend payments to the financial sponsor through 2018.Based on these assumptions, we arrive at the following credit measures:Debt-to-EBITDA of around 2.5x-3.0x in 2016 and 2017; andFOCF-to-debt of around 9%-12% in 2016 and 2017.
We assess JAC's liquidity as adequate. This is a key supportive factor for our rating on the company. Our assessment also incorporates the following expectations and assumptions:The company's sources of liquidity, including cash and credit facility availability, will be 1.2x its uses or more over the next 12-18 months;The company's net liquidity sources will remain positive even if its EBITDA declines by more than 15%;We assume no material acquisitions in 2016 or 2017; andWe believe that the company has generally sound relationships with its bank partners. Principal liquidity sources:Cash, cash equivalents, and short-term marketable securities of about $19.8 million as of July 4, 2016; andAvailability of about $40 million under its asset-based lending (ABL) revolver. Principal liquidity uses:Capex of around $10 million annually; andOur assumption of no dividend payments to the financial sponsor in 2016 or 2017.The $40 million senior secured revolving facility contains a springing fixed charge coverage ratio of 1.1x, which is tested if excess availability falls below 12.5%. Per our base-case forecast, we do not expect this covenant to be triggered over the next 12 months. The senior secured notes have no financial maintenance covenants.
The stable outlook reflects our belief that JAC will sustain the recent improvement in its credit metrics over the next year despite the modest expected slowdown in light vehicle sales growth over the next 12 months.
We could downgrade JAC if its EBITDA margins decline and its FOCF-to-debt ratio falls below 5%, or if its debt-to-EBITDA metric rises significantly above 5x on a sustained basis. This could be caused by an inability to effectively manage its new business launches or an inability to counter ongoing customer price downs with improved cost efficiencies. Alternatively, this could also be caused by a decline in SUV sales due to a spike in gasoline prices.
While unlikely, we would consider upgrading JAC if we come to believe that it can sustain a FOCF-to-debt ratio of at least 10% on a normalized basis while maintaining a debt-to-EBITDA metric of less than 4x. Moreover, the company's private-equity sponsor would also have to reduce its stake in the company to less than 80%. Alternatively, we could upgrade the company if it significantly strengthened its business risk profile by improving its product and geographic diversity.