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Related Issuers
Rating Action:

Moody's raises Allison Transmission's Corporate Family Rating to B2, rating outlook stable

26 Apr 2011

Approximately $4.1 billion of debt obligations affected

New York, April 26, 2011 -- Moody's Investors Service raised Allison Transmission, Inc.'s (Allison) Corporate Family and Probability of Default ratings to B2 from B3. In a related action, Moody's also assigned a Caa1 rating to $500 million of new senior unsecured notes which will be used to fund the company's recently announced tender offer for its remaining senior unsecured 11 ¼ % toggle notes due 2015. The ratings were also raised on Allison's secured bank credit facilities to B1 from B2, and existing senior unsecured notes to Caa1. A Speculative Grade Liquidity Rating was assigned at SGL-2. The rating outlook is stable.

The following rating was assigned:

Senior unsecured notes due 2019, at Caa1 (LGD-5, 89%);

The following ratings were raised:

Corporate Family Rating, to B2 from B3;

Probability of Default, to B2 from B3;

Senior secured revolving credit facility, to B1 (LGD-3, 37%) from B2 (LGD-3, 37%);

Senior secured term loan, to B1 (LGD-3, 37%) from B2 (LGD-3, 37%);

Senior unsecured 11% notes due 2015, to Caa1 (LGD-5, 89%) from Caa2 (LGD-5, 89%);

Senior unsecured 11 ¼ % toggle notes due 2015, to Caa1 (LGD-5, 89%) from Caa2 (LGD-5, 89%); -- this rating will be withdrawn if fully repaid upon completion of the tender offer.

RATINGS RATIONALE

The raising of Allison's Corporate Family Rating to B2 recognizes improved credit metrics resulting from important structural changes that have allowed the company to restore margins even as the overall volume of transmissions produced has remained below pre-recession levels. As the result of headcount reductions, a multi-tier wage structure facilitated under the UAW labor agreement and other restructuring initiatives, Allison's EBIT margin improved to about 18% in 2010 while unit sales volumes remained about 30% below 2007 levels. We expect that unit volumes will grow at a moderate pace over the next several years as the economic recovery stimulates new vehicle demand, and that by sustaining its stronger margins, Allison will deliver higher earnings and cash flow that will contribute to improving credit metrics.

Through the recent economic recession and gradual recovery, Allison has maintained its competitive position as the leader in manufacturing commercial vehicle automatic transmissions. However, industry unit volumes have not recovered to pre-recession levels and may not for some time. Allison's core market is in providing transmissions for Class 4 through 8 commercial vehicles in North America. While vocational vehicles such as those used by tradesmen have seen increased demand with the economic recovery, demand for some other vehicle types, such as school busses and emergency vehicles which are affected by municipal budget considerations, could face continued headwinds. Moreover, volumes will also suffer from a lower volume of military sales. Nevertheless, passenger and operator safety requirements should support improving demand over the intermediate term. In addition, current trends emphasizing greater fuel efficiency and lower emissions, along with aging vehicle fleets, are expected drive moderate growth.

Allison continues with relatively high financial leverage stemming from its acquisition by private equity sponsors, The Carlyle Group and Onex Corporation, in 2007. Funded debt of about $3.7 billion eclipses annual revenue of just below $2.0 billion. Even with the company's strong margins, Debt/EBITDA stood at about 6.2x for the year ended 12/31/10. This high level of leverage, in conjunction with the cyclical nature of the business is consistent with the B2 Corporate Family Rating. The company has filed an S1 registration statement to issue up to $750 million of equity as part of an Initial Public Offering expected during 2011. The company has indicated that proceeds from the offering could be used for debt reduction. The timing and magnitude of any IPO transaction remains uncertain, but pro forma for an equity issuance of the full $750 million, Moody's estimates that Debt/EBITDA would fall to about 5x, a level still indicative of a rating in the single B range. The company has also announced a tender offer to redeem its 11.25% notes due 2015, with proceeds from the new notes offering. The transaction is expected to result in an extended maturity profile and lower interest costs that are viewed favorably in the rating.

The SGL-2 Speculative Grade liquidity rating reflects Moody's expectation that Allison will maintain a good liquidity profile supported by strong cash balances and expected free cash flow generation over the next twelve months. Cash balances as of March 31, 2011 were $352 million. About $100 million of the cash balance is expected to be used for transaction expenses and premiums related to the announced tender offer. Moody's expects Allison to be free cash flow positive over the near-term as commercial vehicle demand gradually recovers. The company faces only about $31 million of required amortization under its outstanding term loans over the coming twelve months. Liquidity support also is provided by Allison's secured revolving credit facility which had approximately $317 million of undrawn availability, less outstanding letters of credit of $10.6 million, as of March 31, 2011. This facility matures in August 2013. The principal financial covenant is a total senior secured leverage ratio test which tightens over the life of the senior secured credit facility. While covenant cushions will likely reduce over the coming months, the company is expected to have sufficient cushion to maintain operating flexibility.

The stable outlook anticipates that Allison will continue to enjoy a very strong competitive position as a supplier of automatic transmissions, but that a slow pace of recovery in unit volumes will constrain revenue growth in the single digit range for the near term. The outlook also considers that the company will continue to benefit from its restructuring initiatives and maintain an EBIT margin in the 17% range. Although working capital and CAPEX needs associated with business expansion will consume funds, the rating anticipates that Allison's free cash flow will facilitate modest debt reduction over the coming year.

Completion of the proposed $750 million equity offering with proceeds applied to debt reduction, such that Debt/EBITDA is maintained below 5x could favorably affect the rating or rating outlook, as could stronger growth in unit volumes or further improvement in margins that results in EBITA/Interest being consistently above 2.0x.

The rating or rating outlook would be adversely impacted if renewed economic pressures, or an inability to contain costs were to result in a deterioration in EBIT margins below 15%, if for any reason EBITA/Interests were to fall back below 1.5x or if Debt/EBITDA were to increase above 6.5x, or if the company's liquidity profile were to weaken.

The principal methodology used in rating Allison was the Global Automotive Supplier Industry Methodology, published January 2009. Other methodologies used include Loss Given Default for Speculative Grade Issuers in the US, Canada, and EMEA, published June 2009.

Allison Transmission, Inc., headquartered in Speedway, IN, designs and manufactures automatic transmissions for commercial and military vehicles. Revenues in 2010 were roughly $1.9 billion.

REGULATORY DISCLOSURES

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 Analytics information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, 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 for further information.

Please see the Credit Policy page on Moodys.com for the methodologies used in determining ratings, further information on the meaning of each rating category and the definition of default and recovery.

New York
Timothy L. Harrod
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's raises Allison Transmission's Corporate Family Rating to B2, rating outlook stable
No Related Data.
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