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Global Credit Research - 03 Jan 2011
Approximately $3.0 billion of rated debt obligations affected
New York, January 03, 2011 -- Moody's Investors Service raised TRW Automotive, Inc.'s (TRW)
Corporate Family and Probability of Default ratings to Ba2 from B1.
In a related action Moody's also raised the ratings of the senior secured
revolving credit facilities to Baa2 from Ba1, and raised the ratings
for the guaranteed senior unsecured notes to Ba2 from B2. The Speculative
Grade Liquidity Rating was affirmed at SGL-2. The rating
outlook is stable.
Corporate Family Rating, to Ba2 from B1;
Probability of Default Rating, to Ba2 from B1;
$1.256 billion combined senior secured domestic and global
revolving credit facilities, to Baa2 (LGD1, 4%) from
Ba1 (LGD1, 7%);
$500 million senior unsecured notes due 2014, to Ba2 (LGD4
56%) from B2 (LGD4, 60%);
Euro 275 million senior unsecured notes due 2014, to Ba2 (LGD4 56%)
from B2 (LGD4, 60%);
$600 million senior unsecured notes due 2017, to Ba2 (LGD4
56%) from B2 (LGD4, 60%);
$250 million senior unsecured notes due 2017, to Ba2 (LGD4
56%) from B2 (LGD4, 60%);
Speculative Grade Liquidity Rating, at SGL-2
The $259 million of exchangeable notes are not rated by Moody's.
The upgrade of TRW's Corporate Family Rating (CFR) to Ba2 acknowledges
the significant improvement in the company's operating performance
and credit metrics that has resulted from the cyclical recovery in automotive
demand and structural changes that the company has made in its business.
TRW's EBIT margin of 7.6% (using Moody's standard
adjustments) for the LTM period ended 10/1/10 benefits from the significant
restructuring actions taken during the last several years and is higher
than the company achieved in 2007 when overall auto production rates were
considerably higher. As the result of an equity issuance,
debt repayments, and debt refinancing to extend maturities,
TRW's balance sheet has also been strengthened, and with Debt/EBITDA
of 2.3x and EBIT/Interest of 3.8x at 10/1/10 the company's
metrics have improved to levels supportive of a higher rating.
Automotive demand is expected to show further growth as the economy strengthens,
and TRW is well positioned to benefit from higher rates of OEM auto production.
Yet, we expect the pace of further improvement in TRW's metrics
to moderate as working capital, CAPEX and other expenditures increase
to support business growth. Nevertheless, we would expect
that overall credit metrics will remain well supportive of the Ba2 rating,
and that with a strong liquidity profile TRW has flexibility to withstand
cyclical changes in industry demand which remain a hallmark of the automotive
TRW's competitive strengths include a diversified portfolio of automotive
components and sub-systems that are critical to vehicle performance
and safety, ongoing technology investments that support its product
leadership, and a broad geographic reach that facilitates a balanced
exposure to automotive OEM's globally. TRW's technology
leadership is supported by company funded research and development spending
that approximates 6% of annual revenue and is focused on vehicle
performance and safety products. We expect this focus to support
TRW's product pricing and overall revenue growth even as the auto
parts sector contends with renewed annual price-down requirements
from OEM's. Regional variances in automotive demand will
pose some challenges for the company, including the possibility
of slower growth in Europe (approximately 58% of TRW's 2009
sales) due to the impact on consumer spending from European government
austerity programs. Yet, with a strong presence in North
America and important growth initiatives in developing markets such as
China and Brazil, TRW's business offers good offsetting growth
opportunities. Moreover, based on 2009 sales, with
no single vehicle platform accounting for more than 4% of revenue,
and no single OEM accounting for more than 20% of revenue,
the company's product and customer diversity are also well established.
TRW's 7.6% EBIT margin for the LTM period ending 10/1/10,
is markedly stronger than the 4-5% margin range demonstrated
by the company between 2005 and 2007, and stems from actions taken
by the company during the recession to reduce excess capacity and labor
headcount. Going forward we expect some margin headwinds from reinstatement
of incentive compensation and other costs associated with increased production
rates. Moreover, as economic conditions improve, commodity
costs for raw materials and energy costs will likely increase, and
TRW along with other automotive parts suppliers will be challenged to
pass on these costs to their OEM customers. Consequently,
we do not currently anticipate any further improvement in the company's
margins, even as higher volumes contribute to greater overhead absorption.
Yet, with favorable pricing opportunities and ongoing benefits from
restructuring actions, we expect TRW to sustain margins above its
historic norms over the intermediate term.
The significant reduction in CAPEX and working capital requirements during
the recession benefitted free cash flow generation, and facilitated
some of the debt reduction achieved by the company. Working capital
needs have already increased as automotive demand increased during 2010,
but are likely to continue to represent a modest use of cash going forward,
particularly as the company's business expands in developing markets.
Moreover, CAPEX which averaged around 50% of depreciation
during 2009 and 2010 should rebound to a more traditional levels that
approximate depreciation as the demands of business growth require new
fixed asset investments. We expect that TRW will fund these investment
requirements through internally generated funds, and do not anticipate
any increases in funded debt. While we expect TRW to remain free
cash flow generative, the magnitude of free cash flow generation
will moderate from levels seen during the LTM period ended 10/1/10.
The stable rating outlook considers TRW's strong credit metrics
supported by a good liquidity profile. Further improvement in TRW's
credit metrics may be challenged by increased costs and investments required
to meet stronger demand for global automotive production in 2011.
Yet, overall metrics are expected to remain strongly supportive
of the Ba2 rating.
Consideration for a higher ratings or rating outlook would include:
maintaining EBIT margins in the high single digits while further expanding
the business at least in line with overall industry growth; funding
business investment needs from internal sources while sustaining a good
liquidity profile; and further improving the capital structure.
Credit metrics which might be associated with a higher rating include
Debt/EBITDA moving below 2.0x, EBIT/Interest sustained above
4x, and FCF/Debt sustained above 10%.
Future events that have the potential to lower TRW's outlook or
ratings include deteriorating industry conditions without sufficient offsetting
restructuring actions or savings by the company, or if TRW is unable
to maintain adequate liquidity levels to operate through a prolonged industry
downturn. Lower ratings could result from EBIT margins approaching
the low single digits, or EBIT/Interest coverage falling below 2.5x.
TRW's SGL-2 Speculative Grade liquidity rating anticipates that
the company will maintain a good liquidity profile over the near-term
supported by a $1.256 billion revolving credit facility
and $1.1 billion of cash and cash equivalents as of October
1, 2010. Moody's anticipates that TRW will generate
free cash flow more than sufficient to cover increased levels of capital
expenditures to support new program growth. As of October 1,
2010, the revolving credit facility was unfunded with $39
million of issued letters of credit. Given TRW's strong cash
balances, the revolving credit facility will likely remain unfunded
over the next twelve months despite typical first quarter working capital
needs. The financial covenant cushions over the near-term
are expected to allow full access to the revolver availability.
While the current bank debt is secured by substantially all of the company's
domestic assets, the bank facility provides room for additional
The last rating action was on August 4, 2010 when TRW's Corporate
Family Rating was raised to B1.
The principal methodologies used in this rating were Global Automotive
Supplier Industry published in January 2009, and Loss Given Default
for Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
TRW Automotive, Inc., headquartered in Livonia,
MI, is among the world's largest and most diversified suppliers
of automotive systems, modules, and components to global vehicle
manufacturers and related aftermarket. The company has four operating
segments: Chassis Systems, Occupant Safety Systems,
Automotive Components, and Electronics. Its primary business
lines encompass the design, manufacture, and sale of active
and passive safety related products. Revenues in 2009 were approximately
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
and public 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
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Investors Service provides a date that it believes is the most reliable
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Please see the ratings disclosure page on our website www.moodys.com
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Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
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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 TRW's Corporate Family Rating to Ba2, rating outlook stable
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New York, NY 10007
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