Approximately $11.4 billion of rated obligations affected
New York, May 13, 2020 -- Moody's Investors Service, (" Moody's ") downgraded the ratings
of Clarios Global LP ("Clarios") - including corporate
family rating (CFR) to B2 from B1, the probability of default rating
(PDR) to B2-PD from B1-PD, senior secured ratings
to B1 from Ba3; and senior unsecured rating to Caa1 from B3.
The rating outlook is stable. This action concludes the review
for downgrade initiated on March 26, 2020.
Moody's also assigned a B1 rating to Clarios' new $500
million senior secured notes. The net proceeds of the notes will
be used for general corporate purposes and support Clarios' liquidity
profile.
The following ratings were downgraded:
.Issuer: Clarios Global LP
.... LT Corporate Family Rating, to
B2 from B1 review for downgrade
.... Probability of Default Rating,
to B2-PD from B1-PD review for downgrade
....Senior Secured Bank Credit Facility,
to B1 (LGD3) from Ba3 review for downgrade (LGD3)
....Senior Secured Regular Bond/Debenture,
to B1 (LGD3) from Ba3 review for downgrade (LGD3)
....Senior Unsecured Regular Bond/Debenture,
to Caa1 (LGD6) from B3 review for downgrade (LGD5)
The following rating was assigned
.Issuer: Clarios Global LP
....Senior Secured Regular Bond/Debenture,
at B1 (LGD3).
Outlook Actions:
..Issuer: Clarios Global LP
....Outlook, Changed To Stable From
Rating Under Review
RATINGS RATIONALE
Clarios' ratings, including the B2 CFR, incorporate
financial leverage which is higher than Moody's initial expectations
even before the business impact from the coronavirus pandemic, and
which will likely be exacerbated by the pandemic's effect on consumer
demand in the automotive aftermarket and original equipment market.
Clarios' debt/EBITDA is estimated at about 9x for the LTM period
ending March 31, 2020 (inclusive of Moody's standard adjustments,
and excluding certain management adjustments), which will be elevated
well into the company's 2021 fiscal year. Clarios'
purchase of a JV interest in 2019 explained some of the higher than expected
leverage, yet Moody's expects the company will be acquisitive
over time. The company's profits and cash flow have been
weaker than expected, in part reflecting the relatively warm winter
season which yielded fewer automotive battery failures, and will
be pressured down further by automotive manufacturer temporary plant closures
and stay-at-home policies. Moody's expects
the free cash flow to be moderately negative for this year even anticipating
some second half 2020 benefits from working capital release.
Positively, Clarios is a very substantive entity with a strong market
share in automotive batteries, relatively strong low double-digit
EBITA margins as an automotive aftermarket parts supplier, longstanding
customer relationships, and high barriers to entry given the industry's
environmental liability risks. Clarios' automotive aftermarket
sales (about 75%) benefit from a more stable, albeit lower,
growth profile then that of original equipment automotive vehicles.
Clarios' products benefit from the large existing consumer vehicle
fleet which uses traditional SLI batteries, and a gradual mix shift
to advanced batteries that support start-stop fuel economy technologies
and increased automotive vehicle electrification. Clarios has a
well developed used battery collection and lead recycling operation,
which aids efficiency by controlling the prime raw material cost.
Clarios is also expected to benefit from ongoing efforts to improve operating
efficiencies and cost savings in the range of $300- $400
million though 2023.
The stable outlook reflect Clarios' competitive position as a leading
supplier of automotive batteries and that the company's recent top
line results reflect demand that will return into 2021 as battery failures
continue and automotive manufacturer operations recover.
Clarios is expected to have an adequate liquidity profile through calendar
2020 supported by a $750 million asset based revolving credit facility
and a $750 million cash flow revolving credit facility.
As of March 31, 2020 cash on hand was in the mid $300 million
range. While availability under the ABL facility was modest at
March 31, 2020, the cash flow revolving credit facility was
mostly availability. The financial covenant under the senior secured
facilities is a springing maximum first lien net leverage ratio test,
based on availability, with no step downs. The asset based
revolving credit facility has a springing fixed charge coverage test,
based on availability. These availability thresholds are unlikely
to trigger over next 12 months, while covenant cushion may be pressured.
We expect free cash flow generation will be moderately negative for fiscal
year-end September 2020, largely due to the impact of the
coronavirus pandemic. With the seasonality of Clarios' business,
LTM negative free cash flow will likely increase to over $100 million
range into the first 2 quarters of fiscal 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be downgraded with expectations that Debt/EBITDA will
be sustained above 8x, and EBITA/interest below 1x into the back
half of 2021. Developments with the potential to negatively impact
the company's metrics include, rising raw material cost which are
not passed on to customers, the loss of a meaningful customer,
the inability to meaningfully reflect the results of the company's cost
savings programs, or adverse environment liabilities. A deterioration
in liquidity could also result in rating downgrades.
The rating could be upgraded with consistent improvement in cash flow
generation and debt reduction driving Debt/EBITDA below 7x and EBITA/Interest
approaching 2.5x.
Clarios's role in the automotive industry exposes the company to
material environmental risks arising from increasing regulations on carbon
emissions. As automotive manufacturers seek to introduce more electrified
powertrains, this market shift will be more impacted by hybrid vehicle
technology over the next 5-7 years, rather than battery electric
vehicles. Clarios's advanced battery product offerings address
this trend. In addition, lead acid batteries will continue
to be important in the transition to electric vehicles. Lead acid
batteries contain the necessary cold cranking power for SLI applications
in electric vehicles.
Clarios maintains positive governance considerations on debt repayment
policies. Yet, the execution of this policy has been delayed
by the funding of a joint venture interest, and weaker than anticipated
operating performance. Clarios's free cash flow generation
is highly seasonal, largely occurring in the second-half
of the fiscal year. As Clarios enters its fiscal year 2021,
we anticipate debt reduction to resume.
The principal methodology used in these ratings was the Automotive Supplier
Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Clarios Global LP (Clarios), headquartered in Milwaukee, Wisconsin
is a leading global supplier of lead-acid automotive batteries
for virtually every type of passenger car, light truck and utility
vehicle. The company serves both automotive original equipment
manufacturers and the general vehicle battery aftermarket and also supplies
advanced battery technologies to power start-stop, hybrid
and electric vehicles. The company will be owned by affiliates
of Brookfield Business Partners L.P. and other institutional
partners including Caisse de dépôt et placement du Québec.
Revenues for the LTM period ending March 31, 2020 were approximately
$8.0 billion.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated
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Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s)
announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was
issued by one of Moody's affiliates outside the EU and is endorsed
by Moody's Deutschland GmbH, An der Welle 5, Frankfurt
am Main 60322, Germany, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
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Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Timothy L. Harrod
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
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JOURNALISTS: 1 212 553 0376
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