NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded ArvinMeritor's (ARM) Issuer Default Rating (IDR) and outstanding debt ratings as follows:
--IDR to 'CCC' from 'B-';
--Senior secured bank facility to 'B/RR1' from 'BB-/RR1';
--Senior unsecured notes to 'CC/RR5' from 'B-/RR4'.
The ratings remain on Rating Watch Negative pending resolution of potential federal government aid to General Motors and the associated impact on industry production. The Watch Negative is also based on ARM's eroding margins, persistent negative cash flows, the potential need for covenant relief in mid-2009 and related liquidity concerns. The downgrades affect approximately $1.7 billion of debt.
Fitch expects that ARM could violate its covenants for the quarter ending June 30, 2009 due to the likelihood of deteriorating profits and the probable need for increased drawings on the credit facility. The credit agreement calls for the secured leverage ratio to be no greater than 2.5 times (x) through March 31, 2009, but it tightens to 2.0x after that date. To date, lending groups have worked with auto suppliers to provide covenant relief during the downturn, but the potential need for additional capital at ARM and tight collateral coverage, rather than simply covenant relief, provides a more significant hurdle. Fitch notes that the U.S. accounts receivable securitization facility contains financial covenants equivalent to those of the credit agreement, exacerbating concerns about ARM's ability to retain existing capital access.
The downgrade of ARM's IDR is also based on the severe weakening of commercial truck demand in Europe occurring in 2009, expectations of continued weakness in already-weak commercial vehicle U.S. demand from depressed 2008 levels, and financial stress among ARM's customers in this segment. ARM receives approximately two-thirds of its revenue from its commercial vehicle systems group. In addition, ARM's light vehicle systems segment is expected to experience operating losses in 2009 due to severe production cutbacks in the U.S. and a steep decline in global production. Given the current market environment, ARM is unable to divest its light-vehicle systems operations at this time; this segment is expected to produce operating losses and a deteriorating competitive position through 2009, given the low margins in the business and the sharp drop in near-term global production. Fitch believes that the light-vehicle systems group will exacerbate balance sheet and liquidity deterioration in 2009.
Weakness across global end markets over the next twelve months indicates that ARM is expected to remain cash flow negative over this period and that leverage will increase. In the CVS segment, the economic slowdown in the U.S. will hurt Class 8 volumes, and the impact of any pre-buy ahead of new emissions standards in 2010 may be muted. Deteriorating economic conditions in Europe could offset underlying operating improvement that has enhanced recent margin performance. Although the U.S. truck market is coming off a deep downturn in orders, weakening global economic conditions, a stressed customer base and limited fleet financing availability will continue to hamper any rebound in demand. These factors are expected to more than offset ARM's efforts to reduce costs and preserve cash. Initiatives include headcount reductions, planned decreases for capital expenditures in FY09 versus FY08, salary reductions and the suspension of the dividend.
ARM's $664 million secured revolving credit facility is collateralized by assets which include eligible US accounts receivable, inventory, property, plant and equipment, intellectual property and the company's investment in all or a portion of certain wholly-owned subsidiaries. As of Sept. 30, 2008 the collateral was valued at $850 million. However, the collateral fell to $688 million as of Dec. 31, 2008.
ARM has two overseas facilities: the EUR125 million Swedish accounts receivable securitization facility and the EUR125 million French factoring facility. Both facilities extend through October 2009. Other liquidity needs for the company are met through the U.S. accounts receivable facility which allows for the utilization of up to $175 million; the facility expires in September 2009. Additionally, the company has other uncommitted factoring facilities in Europe. ARM makes extensive use of these short-term receivable securitization and factoring facilities. At Dec. 31, 2008, ARM had $499 million outstanding under these facilities, including $93 million (on-balance sheet) under a committed facility in the U.S. and $406 million under committed and uncommitted facilities in which are primarily in Europe (off-balance sheet). Of the European facilities, $320 million was outstanding under $350 million of committed facilities, and $86 million was outstanding under uncommitted lines.
Inability to renew these securitization facilities could force extensive utilization of the company's revolving credit agreement and materially affect the ARM's liquidity position. Given the state of the banking industry, capital markets and the automotive industry it remains uncertain as to the availability of these lines going forward. Under ARM's U.S. facility at Dec. 31, 2008, approximately $185 million in receivables were pledged as collateral for $93 million in proceeds.
ARM's maturity schedule is modest until the bank agreement matures in 2011, but it could further chip away at available liquidity if the company does not return to positive cash flow in the near term. ARM's pension is moderately underfunded in dollar terms, although asset deterioration in 2008 could require incremental contributions over the next several years.
At the end of 1Q'09, ARM had $158 million of cash on the balance sheet and $523 million available on its secured revolving credit facility. During 1Q'09, ARM had $77 million of unsecured notes mature and Fitch believes the company funded the retirement of the notes with additional drawing on its revolver.
The Recovery Ratings (RRs) reflect Fitch's expectations under a scenario in which distressed enterprise value is allocated to various debt classes. The secured lenders recovery rating remains RR1 which indicates a 91-100% recovery based on collateral coverage of the amount permitted to be drawn. The unsecured notes are downgraded from RR4 to RR5 indicating a recovery in the range of 11-30% in the event of a default. The RR was lowered for the unsecured rating given the deterioration of the automotive environment and significant devaluation of global automotive asset values.
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.
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--IDR to 'CCC' from 'B-';
--Senior secured bank facility to 'B/RR1' from 'BB-/RR1';
--Senior unsecured notes to 'CC/RR5' from 'B-/RR4'.
The ratings remain on Rating Watch Negative pending resolution of potential federal government aid to General Motors and the associated impact on industry production. The Watch Negative is also based on ARM's eroding margins, persistent negative cash flows, the potential need for covenant relief in mid-2009 and related liquidity concerns. The downgrades affect approximately $1.7 billion of debt.
Fitch expects that ARM could violate its covenants for the quarter ending June 30, 2009 due to the likelihood of deteriorating profits and the probable need for increased drawings on the credit facility. The credit agreement calls for the secured leverage ratio to be no greater than 2.5 times (x) through March 31, 2009, but it tightens to 2.0x after that date. To date, lending groups have worked with auto suppliers to provide covenant relief during the downturn, but the potential need for additional capital at ARM and tight collateral coverage, rather than simply covenant relief, provides a more significant hurdle. Fitch notes that the U.S. accounts receivable securitization facility contains financial covenants equivalent to those of the credit agreement, exacerbating concerns about ARM's ability to retain existing capital access.
The downgrade of ARM's IDR is also based on the severe weakening of commercial truck demand in Europe occurring in 2009, expectations of continued weakness in already-weak commercial vehicle U.S. demand from depressed 2008 levels, and financial stress among ARM's customers in this segment. ARM receives approximately two-thirds of its revenue from its commercial vehicle systems group. In addition, ARM's light vehicle systems segment is expected to experience operating losses in 2009 due to severe production cutbacks in the U.S. and a steep decline in global production. Given the current market environment, ARM is unable to divest its light-vehicle systems operations at this time; this segment is expected to produce operating losses and a deteriorating competitive position through 2009, given the low margins in the business and the sharp drop in near-term global production. Fitch believes that the light-vehicle systems group will exacerbate balance sheet and liquidity deterioration in 2009.
Weakness across global end markets over the next twelve months indicates that ARM is expected to remain cash flow negative over this period and that leverage will increase. In the CVS segment, the economic slowdown in the U.S. will hurt Class 8 volumes, and the impact of any pre-buy ahead of new emissions standards in 2010 may be muted. Deteriorating economic conditions in Europe could offset underlying operating improvement that has enhanced recent margin performance. Although the U.S. truck market is coming off a deep downturn in orders, weakening global economic conditions, a stressed customer base and limited fleet financing availability will continue to hamper any rebound in demand. These factors are expected to more than offset ARM's efforts to reduce costs and preserve cash. Initiatives include headcount reductions, planned decreases for capital expenditures in FY09 versus FY08, salary reductions and the suspension of the dividend.
ARM's $664 million secured revolving credit facility is collateralized by assets which include eligible US accounts receivable, inventory, property, plant and equipment, intellectual property and the company's investment in all or a portion of certain wholly-owned subsidiaries. As of Sept. 30, 2008 the collateral was valued at $850 million. However, the collateral fell to $688 million as of Dec. 31, 2008.
ARM has two overseas facilities: the EUR125 million Swedish accounts receivable securitization facility and the EUR125 million French factoring facility. Both facilities extend through October 2009. Other liquidity needs for the company are met through the U.S. accounts receivable facility which allows for the utilization of up to $175 million; the facility expires in September 2009. Additionally, the company has other uncommitted factoring facilities in Europe. ARM makes extensive use of these short-term receivable securitization and factoring facilities. At Dec. 31, 2008, ARM had $499 million outstanding under these facilities, including $93 million (on-balance sheet) under a committed facility in the U.S. and $406 million under committed and uncommitted facilities in which are primarily in Europe (off-balance sheet). Of the European facilities, $320 million was outstanding under $350 million of committed facilities, and $86 million was outstanding under uncommitted lines.
Inability to renew these securitization facilities could force extensive utilization of the company's revolving credit agreement and materially affect the ARM's liquidity position. Given the state of the banking industry, capital markets and the automotive industry it remains uncertain as to the availability of these lines going forward. Under ARM's U.S. facility at Dec. 31, 2008, approximately $185 million in receivables were pledged as collateral for $93 million in proceeds.
ARM's maturity schedule is modest until the bank agreement matures in 2011, but it could further chip away at available liquidity if the company does not return to positive cash flow in the near term. ARM's pension is moderately underfunded in dollar terms, although asset deterioration in 2008 could require incremental contributions over the next several years.
At the end of 1Q'09, ARM had $158 million of cash on the balance sheet and $523 million available on its secured revolving credit facility. During 1Q'09, ARM had $77 million of unsecured notes mature and Fitch believes the company funded the retirement of the notes with additional drawing on its revolver.
The Recovery Ratings (RRs) reflect Fitch's expectations under a scenario in which distressed enterprise value is allocated to various debt classes. The secured lenders recovery rating remains RR1 which indicates a 91-100% recovery based on collateral coverage of the amount permitted to be drawn. The unsecured notes are downgraded from RR4 to RR5 indicating a recovery in the range of 11-30% in the event of a default. The RR was lowered for the unsecured rating given the deterioration of the automotive environment and significant devaluation of global automotive asset values.
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.
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