OREANDA-NEWS. Fitch Ratings has assigned Faurecia S.A.'s (Faurecia) proposed EUR500m senior unsecured notes due to mature in 2022 an expected senior unsecured rating of 'BB-(EXP)', in line with Faurecia's Long-term Issuer Default Rating. The rating is contingent upon the receipt of final documentation conforming materially to information already received and of details regarding the amount, coupon rate and maturity.

The net proceeds from the notes issue are expected to be used to redeem the EUR250m senior unsecured notes due in June 2019 and to refinance short-term borrowings. This is part of an on-going refinancing process, which has included a new EUR1.2bn credit facility expiring in December 2019 to replace the EUR1.15bn credit facility falling in December 2016.

The notes will rank pari passu with all existing and future senior unsecured indebtedness of Faurecia. They will be guaranteed on a senior unsecured basis by 28 consolidated subsidiaries accounting for 53.8% of Faurecia's EBITDA as of end-2014. All guarantees are expected to fall away upon redemption of the EUR490m senior unsecured notes maturing in December 2016.

The note prospectus does not include any financial covenants but incorporates covenants capping additional indebtedness, limiting dividends and other distributions, consolidations as well as cross default and change of control provisions.

KEY RATING DRIVERS

Leading Market Positions
Faurecia's ratings are supported by its diversification, size and leading market positions. Its large and diversified portfolio is a strength in the global automotive market, which is being reshaped by the development of global platforms and concentration among large manufacturers. The group is well positioned in certain fast-growing segments to outperform the overall auto supply market, notably by offering products that increase the fuel efficiency of its customers' vehicles.

Sound Diversification
Faurecia's healthy diversification by product, customer and geography help smooth the impact of sales/order decline in any one region or manufacturer. Its broad industrial footprint matching its customers' production sites and requirements enables Faurecia to follow its customers in their international expansion.

Weak Profitability, Cash Flows
Operating margin increased to 3.6% in 2014 from 3% in 2013 but remains weak for the group's business as earnings still suffer from few remaining loss-making operations in North and South America. We believe that Faurecia's target to increase its operating margin towards 4.5%-5% by 2016 is achievable, which would be more in line with immediate peers and the 'BB' rating category.

Cash generation is also commensurate with the 'B' category with funds from operations (FFO) margin of 3.8% in 2014, recovering gradually to between 6%-7% in 2016. Free cash flow (FCF) margin is extremely weak (negative 1.1% in 2014, down from 0.2% in 2013) after adjusting for derecognised trade receivables which boosted working capital, but which Fitch considers as a change in debt. However, we project FCF margin to increase gradually to about 2% in 2016.

Linkage with PSA
We rate Faurecia on a standalone basis due to weak legal, operational and strategic ties between the company and its parent Peugeot S.A. (PSA). In particular, we note the historical lack of pressure from PSA to receive dividends from Faurecia, the absence of guarantees to or from PSA and the independent financing of the two companies.

Weak Financial Structure
Adjusted financial debt and leverage have declined continuously in recent years but remain high and commensurate with the 'B' category. Total financial debt was EUR3bn at end-2014, up from EUR2.6bn at end-2013, including Fitch's adjustments for derecognised trade receivables (EUR0.7bn) and operating leases (EUR0.5bn), resulting in a 3.8x and 3.1x FFO adjusted gross and net leverage, respectively, at end-2014. Nonetheless, we project FFO adjusted net leverage to decline towards 2x at end-2016.

Sound Liquidity
Liquidity is supported by EUR0.6bn of readily available cash according to Fitch's adjustments for minimum operational cash of EUR0.4bn at end-2014. The maturity profile is not an immediate risk, with no major debt maturing before November 2016. Total committed and unutilised credit lines were EUR1.2bn at end-2014.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for Faurecia include:
- Revenue growing by 3%-4.5% in 2015-2016
- Group operating margin rebounding to approx. 4.5% by 2016, driven chiefly by automotive seating strengthening to more 5% and other divisions to more than 4%
- Cash interest falling to less than EUR150m by 2016 as a result of cheaper refinancing
- Working capital assumed to be broadly flat over the next couple of years
- Capex ratio about flat in 2015, declining slightly in 2016
- Dividend payment accelerating in 2015 in line with higher net income

RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Significantly lower reliance on original equipment
- Sustained increase of operating margins above 5%
- Sustained increase of FCF margins above 2%

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Inability to sustain the improvement in profitability and cash generation, leading to operating margins remaining below 3% and FCF margins remaining below 1%
- Inability to maintain deleveraging, leading to FFO adjusted net leverage remaining above 3x
- Deteriorating liquidity, notably through difficult or expensive refinancing