CHICAGO--Fitch Ratings has assigned a rating of 'BB+/RR4' to Tenneco Inc.'s (TEN) $500 million in proposed senior unsecured notes due 2026. Fitch rates TEN's Long-Term Issuer-Default Rating (IDR) 'BB+'/Stable Outlook.
A full list of TEN's ratings follows at the end of this release.
TEN intends to use proceeds from the proposed notes to fund the tender offer for its existing $500 million in 6.875% senior unsecured notes due 2020. TEN announced the tender offer today. The tender offer expires on June 10, 2016. The proposed notes will be guaranteed by TEN's wholly-owned domestic subsidiaries that also guarantee the company's secured revolving credit facility and Term Loan A.
KEY RATING DRIVERS
TEN's ratings continue to be supported by the company's market position as a top global supplier of emission control and vehicle suspension components, with a strong presence in both the original equipment and aftermarket segments. In addition, tightening regulations governing commercial truck and off-highway vehicle emissions in a number of global jurisdictions have led to increased growth opportunities and higher profitability for the company. TEN's credit profile is characterized by slowly declining, but somewhat variable, leverage and adequate liquidity. However, free cash flow margins are relatively low.
Primary risks to the company's credit profile include industry cyclicality, volatile raw material costs and variability in fuel prices. Cyclical risk is mitigated somewhat by the increasing diversification of the company's customer base and improving cost structure, as well as ever-tightening global emissions regulations, which will drive growth in the market for emission control products independent of global economic conditions. Also mitigating risk and supporting near-term liquidity is a lack of material debt maturities until 2019. Volatile fuel prices present a risk because TEN's equipment on smaller and more fuel efficient vehicles tends to be less profitable. As with other auto suppliers, TEN seeks to minimize the effect of volatility in raw material prices by passing along a substantial portion of the change in its material costs to its original equipment customers.
An additional risk is the potential for an adverse outcome in the ongoing antitrust investigation of TEN being conducted by the European Commission (EC) and the U.S. Department of Justice (DOJ). Details of the investigation, the potential timing of any resolution and the ultimate exposure to TEN are currently unknown, but the DOJ has granted the company conditional leniency through the Antitrust Division's Corporate Leniency Policy. As such, the DOJ will not seek any criminal fines or penalties against the company, and TEN's potential liability in any follow-on civil antitrust litigation in the U.S. is limited. Nonetheless, a particularly adverse outcome related to the investigations could lead to a negative rating action.
As of March 31, 2016, TEN's EBITDA leverage (as calculated by Fitch) was 2.2x, with total debt of $1.6 billion (including European factored receivables) and EBITDA of $752 million. TEN's EBITDA margin was 9.0%. FFO adjusted leverage was 3.2x at March 31, 2016. TEN's debt tends to vary seasonally as negative working capital at certain times of the year leads to increased borrowings that the company repays at other points during the year.
Free cash flow grew (FCF) in the 12 months ended March 31, 2016 was $201 million (adjusted for the effect of factored receivables), leading to a FCF margin of 2.4%. Liquidity at March 31, 2016 included $374 million in cash and cash equivalents and $912 million in availability on the company's $1.2 billion secured revolver. Most of TEN's cash is generally held outside the U.S., and much of it could be subject to additional withholding taxes if repatriated.
TEN's secured revolver and secured Term Loan A have a recovery rating of 'RR1' and are rated one-notch above the company's IDR, reflecting their substantial collateral coverage, which includes virtually all of the company's U.S. assets and up to 66% of the stock of its first-tier foreign subsidiaries. Based on Fitch's criteria, 'BBB-' is the highest issue rating that may be assigned to an issuer with an IDR of 'BB+'. TEN's senior unsecured notes have a recovery rating of 'RR4' and are rated the same as the company's IDR, reflecting Fitch's expectations for an average recovery in a distressed scenario.
--Global economic conditions continue to improve at a modest pace, leading to low-single digit growth in global auto production.
--In addition to increased auto production, TEN's revenue benefits from higher commercial vehicle and off-road equipment demand as emissions regulations in these segments continue to tighten many global markets.
--With the improving vehicle production volumes and increased penetration, TEN's revenue and profitability grow, but negative foreign exchange masks much of the near-term revenue improvement.
--Capital spending remains elevated by historical standards over the intermediate term to support new product wins and growth in the company's manufacturing footprint.
--Debt maturities are refinanced through the next several years.
--Share repurchases total $550 million through year end 2017, and the company continues with share buybacks following the expiration of the current program.
--The company generally maintains between $250 million and $300 million in cash on its balance sheet.
Positive: Further developments that may, individually or collectively, lead to a positive rating action include:
--An Increase in TEN's value-added free cash flow margin to about 3% on a consistent basis;
--A decline in FFO adjusted leverage to 2.5x or lower;
--An increase in FFO fixed charge coverage to 5x or higher.
Negative: Further developments that may, individually or collectively, lead to a negative rating action include:
--A severe decline in global vehicle production that leads to reduced demand for TEN's products;
--A decline in TEN's value-added free cash flow margin to below 1% for an extended period;
--An increase in FFO adjusted leverage to 4x or higher;
--A decline in FFO fixed charge coverage to 3x or lower;
--An adverse outcome from the antitrust investigation that lead to a significant decline in liquidity or an increase in leverage.
Fitch currently rates Tenneco Inc. as follows:
--Secured revolving credit facility rating 'BBB-/RR1';
--Secured Term Loan A rating 'BBB-/RR1';
--Senior unsecured notes rating 'BB+/RR4'.
Date of relevant rating committee: March 26, 2015
Summary of Financial Statement Adjustments: Fitch has made no material adjustments that are not disclosed within the company's public filings.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)