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-- this rating will be withdrawn if fully repaid upon completion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.
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
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
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
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on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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Timothy L. Harrod
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's raises Allison Transmission's Corporate Family Rating to B2, rating outlook stable
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