Correct: Fitch Rates Faurecia's EUR500m Unsecured Notes 'BB-(EXP)'

Fitch Ratings has assigned Faurecia S.A.'s (Faurecia; BB-/Stable) proposed EUR500m senior unsecured notes maturing in June 2023 a 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 will be used to redeem the EUR490m notes due in December 2016. As a result of the make-whole redemption of the 2016 notes, all existing upstream guarantees on other instruments will fall and will lead all senior unsecured debt issued by Faurecia to become unguaranteed and pari passu with all existing and future senior unsecured indebtedness.

Fitch believes that the issuance simplifies the group's financial structure and further strengthens its financial flexibility. In addition, we expect further positive rating pressure on the group in the short term following the solid results posted in 2015 and improving prospects in the foreseeable future.

The note prospectus incorporates covenants in line with Faurecia's 2022 senior notes, including a cap on additional indebtedness, a limitation on dividends and other distributions, consolidations as well as cross default and change of control provisions. A debt incurrence covenant of the consolidated senior net indebtedness ratio not exceeding 0.75x has been added to this issuance, in a supplement to the debt incurrence covenant of the fixed charge coverage ratio not exceeding 2.0x.

KEY RATING DRIVERS
Weak but Strengthening Financial Structure
Faurecia's financial structure was commensurate with the 'B' category at end-2014, including funds from operations (FFO) adjusted net leverage at 3.1x, and cash from operations (CFO) on debt around 20%. However, it improved at end-2015, proforma of the disposal of the Automotive Exterior (FAE) business whose cash proceeds should be received in 2016. We expect a modest increase in capex and potential small acquisitions with the proceeds of FAE to limit the improvement in free cash flow (FCF) and leverage.

Improving Profitability and FCF
The operating margin recovered in 2014 and strengthened further to 4.4% in 2015. We expect a further progression towards 5% in 2016, a level more in line with close peers and a 'BB' rating. Cash generation is also improving to levels more commensurate with the 'BB' category with the FFO margin increasing to more than 5.0% in 2015, from 3.9% in 2014 and 2.9% in 2013. The FCF margin remains weak for the rating after adjusting for derecognised trade receivables that boosted working capital and, in turn CFO and FCF, but became positive in 2015. We also project that the FCF margin will increase gradually through 2018.

Leading Market Positions
Faurecia's ratings are supported by its diversification, size and leading market positions as the seventh largest global automotive supplier. 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. Fitch also believes that the group is well positioned in some fast-growing segments to outperform the overall auto supply market, notably by offering products increasing the fuel efficiency of its customers' vehicles.

Sound Diversification
Faurecia's healthy diversification by product, customer and geography can smooth the potential sales decline in one particular region or lower orders from one specific manufacturer. Its broad industrial footprint matching its customers' production sites and needs enables Faurecia to follow its customers in their international expansion.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Faurecia include:
- Revenues to increase by mid-single digits in 2016-2018.
- Operating margins to increase toward 6% by 2018.
- Restructuring cash outflows to remain around EUR70m per year over 2016-2018.
- Capex of around 4.5% of revenue.
- Dividend pay-out ratio of around 20%-25%.
- Proceeds of the FAE disposal in 2016, small acquisitions with the proceeds in 2016-2018.

RATING SENSITIVITIES
Negative: Future developments that could, individually or collectively, lead to a downgrade include:
- Inability to sustain the improvement in profitability and cash generation, leading in particular to operating margins remaining below 3%.
- FCF margins remaining below 1%.
- Inability to sustain the decrease in leverage, leading in particular to FFO adjusted net leverage remaining above 3x.
- Deteriorating liquidity, notably through difficult or expensive refinancing.

Positive: Future developments that could, individually or collectively, lead to positive rating action include:
- Sustained increase of operating margins above 5%.
- Sustained increase of FCF margins above 2%.