NEW YORK - (Business Wire) Fitch Ratings has placed American Axle's (Axle) 'B' Issuer Default Rating (IDR) on Rating Watch Negative, reflecting the uncertainty of General Motor's (GM) short-term operating and financial profile.
GM's IDR of 'CCC' was recently placed on Rating Watch Negative. According to a Fitch press release, 'GM will require direct federal assistance over the next quarter and the forbearance of trade creditors in order to avoid default'. The ratings for American Axle currently assume that GM is provided with federal assistance and continues to operate, in or outside of bankruptcy. The bankruptcy of GM would result in a review of American Axle's rating, with the expected result being a downgrade of one to two notches. GM accounted for 73% of Axle's total net sales in through the first nine months of 2008. Fitch would also review the ratings in the event that Chrysler's pickup sales are disrupted due to financial stresses.
The rating actions on Axle's bank agreement and unsecured debt incorporate the recent amendment to Axle's bank and term loan agreements. These facilities have been assigned ratings of 'BB-/RR2', reflecting the improved position of secured lenders due to the granting of collateral. The ratings on Axle's senior unsecured debt have been downgraded to 'CCC+/RR6' due to the weakened recovery prospects of the unsecured lenders.
The amended bank agreement reduces the amount of the facility from $600 million to $477 million, while also increasing the pricing (on the majority of the facility) and extending the maturity on $369 million of the facility to December 2011. The remaining $108 million will retain the original maturity date of April 2010. Collateral includes U.S. receivables and inventory, U.S. PP&E (subject to indenture restrictions), intracompany notes, and a pledge of 65% of the company's international subsidiaries. Financial tests include a senior secured leverage test that loosens through the first half of 2009, but then begins to tighten as Axle realizes the benefits of new business wins, a completed restructuring program, and as the impact of the second-quarter 2007 strike is removed from last-twelve-month calculations. The agreement also allows a basket for the incurrence of additional U.S. secured and unsecured debt. Fitch views the amendment as a positive, solidifying the company's liquidity position over the next several quarters.
Axle is in the midst of a restructuring effort that is dramatically reducing the company's fixed cost structure through headcount reductions, wage buy-downs, employee benefit reductions and the migration to lower-cost facilities. Sales related to GM's GMT-900 platform, the driver of Axle's operating performance, are expected to remain at deeply depressed levels into 2009, with the timing and extent of any rebound uncertain. Fitch believes that despite the expectation of continued weakness in the housing market, industry sales of pickups may be approaching replacement demand levels, thereby limiting material declines from GM pickup truck production levels from those in the fourth quarter of 2008. Operating results will continue to be pressured over the near term by the sales environment and the limited availability of customer financing.
Axle's liquidity is fairly healthy, aided by recent draws under the company's revolving credit facility. Cash was $454 million at Sept. 30, 2008, excluding $117 million that is currently trapped in an illiquid money-market account. Negative cash flows related to operating losses and restructuring costs have been partially offset by $115 million provided by GM to facilitate the reduction in labor costs. Approximately half of the $450 million in total restructuring costs will be borne by GM. Cash drains in 2008 will reflect these costs, with Axle's portion being felt most heavily in the fourth quarter. Cash outflows will be more limited in 2009, with GM payments roughly offsetting employee reduction costs. Cash is expected to be more than adequate to finance expected negative cash flow, as long as covenant compliance is maintained throughout the year.
The rating of 'BB-/RR2' indicates strong recovery of 70-90% in the event of a bankruptcy filing. This scenario (that includes GM as a going concern) assumes that full recovery would not be realized because the primary driver of a bankruptcy scenario would be related to GM, and that recovery values would reflect the further deterioration in asset values and in the enterprise value.
The following ratings are placed on Rating Watch Negative:
American Axle & Manufacturing Holdings, Inc
--Long term IDR 'B'.
American Axle & Manufacturing, Inc.
--Long term IDR 'B';
--Senior Unsecured 'CCC+/RR6';
--Senior Secured 'BB-/RR2'.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
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