Approximately $325 million of rated debt affected
New York, March 09, 2011 -- Moody's Investors Service affirmed the Corporate Family and Probability
of Default Ratings of HHI Holdings, LLC ("HHI") at B2. In
a related action Moody's assigned a B2 rating on the senior secured
term loan. The rating outlook is changed to positive.
HHI plans to use the proceeds of the $325 million new senior secured
term loan to refinance the existing $222 million senior secured
term loan, fund a distribution to equity holders (including the
company's sponsor, KPS Capital Partners, LP and minority equity
holders, including Mitsubishi Corporation) and pay related fees
and expenses. This special distribution follows other special distributions
made in September 2010 and March 2010.
The following ratings were assigned:
B2 (LGD4, 50%), for the $325 million senior
secured term loan
The following ratings were affirmed:
Corporate Family Rating, B2;
Probability of Default, B2;
B3 (LGD4, 59%), for the existing $222 million
senior secured term loan (this rating will be withdrawn upon the facility's
The affirmation of HHI's B2 Corporate Family Rating reflects Moody's
view that while the company's leverage will increase following the
transaction, the incremental leverage will still be modestly less
than previous expectations for year-end 2010 under the prior term
loan. HHI's performance in 2010 outpaced Moody's expectations
as a result of stronger profitability in the company's forging operations
following the October 2009 acquisition of Formtech Industries, LLC.
That said, the benefit to the company's debt leverage profile
is substantially offset by the company's third distribution to equity
holders over the last 12 months. The CFR also continues to embody
the company's modest size, high regional exposure to North America,
and high customer concentrations to the Detroit-3 (about 75%
of revenues). As such, the company is very susceptible to
the cyclical automotive industry and fluctuations in the operations and
end-markets of its major customers.
The ratings benefit from barriers to entry, including high capital
investment requirements for the forging industry. Through the acquisition
of forging assets, HHI has developed a material share of the outsourced
forging market within the automotive industry. HHI has successfully
demonstrated an ability to integrate a number of automotive forging acquisitions
over the recent years while the automotive industry has experienced a
significant downturn in production followed by a modest recovery.
The positive rating outlook incorporates Moody's view that, despite
the incremental leverage generated by the proposed distribution to equity
holders, expected improvement in North American automotive production
should support HHI's improved operating performance over the near-term.
The terms of the new senior secured term loan and asset based revolver
are expected to include significantly improved borrowing rates such that
interest costs are expected to remain relatively unchanged. This,
combined with the company's expected performance, should result
in strong interest coverage over the near-term, and thus
be supportive of higher ratings. Pro forma for the new capital
structure, fiscal 2010 Debt/EBITDA and EBIT/interest coverage are
expected to approximate 3.2x and 3.8x, respectively
(including Moody's standard adjustments).
The B2 rating on the new senior secured term loan reflects our expectation
of improved recovery prospects, despite its increased size,
following HHI's better than expected performance in 2010.
This improved performance is expected to continue over the intermediate
term. Thus, the deficiency claim on the term loan was removed.
HHI is expected to continue to have a good liquidity profile over the
near-term supported by our anticipation of positive free cash flow
over the next twelve months and availability under the new asset based
revolving credit facility. Cash balances are expected to be nominal
upon completion of the transaction. The new $100 million
asset based revolving credit facility (unrated by Moody's) will be partially
funded at closing. However, the facility is expected to be
largely unused, as the company's strong operating margins
should lead to positive free cash flow generation over the next twelve
months, after nominal required amortization under the term loan.
Financial covenants under the new term are anticipated to include a maximum
debt leverage test and a minimum interest coverage test. The asset
based revolving credit facility is anticipated to have a springing minimum
fixed charge coverage test when availability falls below a determined
level. Alternate liquidity is limited as essentially all of the
company's assets secure the credit facilities.
The rating could improve if HHI were to continue to maintain its strong
niche market position, and revenue participation in the industry's
recovery resulting in EBIT margins maintained above 13%,
debt/EBITDA below 3.0x, and EBIT/Interest above 3.5x.
Further customer and industry diversification could also result in positive
The outlook or rating could be lowered if North American automotive production
levels do not recover as anticipated, resulting in substantially
weaker profitability or a deterioration in liquidity. If operations
were to weaken such that debt/EBITDA were to increase over 4.0
times or free cash flow generation was not realized, the company's
rating and/or outlook could be lowered. The ratings or outlook
also could be lowered if additional shareholder distributions are made.
The last rating action was on September 22, 2010, when the
B2 Corporate Family Rating was affirmed.
HHI Holdings, LLC, headquartered in Royal Oak, Michigan,
is a full service supplier of highly engineered metal forgings and machined
components, wheel bearings, and powdered metal engine and
transmission components for automotive and industrial customers.
Operations are conducted through three subsidiaries: Forging Holdings,
LLC; Bearing Holdings, LLC, and Gearing Holdings,
The principal methodologies used in this rating were Global Automotive
Supplier Industry published in January 2009, and Probability of
Default Ratings and Loss Given Default Assessments published in June 2009.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning/maintaining
a credit rating.
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in assigning a credit rating is of sufficient quality and from sources
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independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Timothy L. Harrod
Vice President - Senior Analyst
Corporate Finance Group
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's affirms HHI Holdings, LLC's ratings on upsized term loan; CFR at B2, positive outlook
250 Greenwich Street
New York, NY 10007