Bangkok--15 Dec--Standard & Poor's
- Michigan-based global auto component supplier Visteon Corp. emerged from Chapter 11 in October 2010. The company is currently owned mainly by former creditors; accordingly, we believe the company's financial and strategic policies could evolve over time.
- We are assigning a 'B+' corporate credit rating on Visteon and a 'BB-' issue-level rating on the company's $500 million senior secured term loan due 2017. The loan is part of the company's bankruptcy emergence financing.
- The outlook is stable, reflecting our view that Visteon can generate positive free cash flow in 2012 and that the company's large cash balances can easily accommodate its cash use in 2011.
Standard & Poor's Ratings Services today said it has assigned its 'B+' corporate credit rating on automotive parts supplier Visteon Corp. The outlook is stable. At the same time, we assigned an issue-level rating of 'BB-' and recovery rating of '2' on the company's $500 million senior secured term loan.
"The rating on Visteon reflects our expectation that the company will continue to improve its operating performance, including margins (before D&A) in the upper single digits, following its emergence from Chapter 11 in October 2010," said Standard & Poor's credit analyst Robert Schulz. "We expect the company's key credit measures to remain fairly consistent during the next year, including adjusted debt to EBITDA under 2x," he continued.
We view Visteon's financial risk profile as aggressive, largely because we assume the company will use cash in 2011 for increased capital spending and cash restructuring. Also, we believe acquisitions or possible future distributions to shareholders could absorb free cash flow and constrain significant debt reduction in the long term. We view the business risk profile as weak (fair geographic, customer, and product diversity, and single-digit operating margins). In our view, the most significant variable in Visteon's near-term credit profile will be vehicle production volumes; Visteon's backlog of business is more than 90% for the next few years. A second variable will be the company's success in further reducing overhead costs.
We estimate that total debt to EBITDA (adjusted for postretirement benefits and operating leases) will be less than 2x at the end of 2010. For the rating, we expect total debt to EBITDA to decline slightly in 2011, even as the company uses some cash. We also expect Visteon to generate positive discretionary cash flow in 2012 through improved operating income and success in managing working capital despite our expectation that capital spending will rise.
Visteon is a large Tier 1 supplier serving the global automaker market. The company has about $7 billion in consolidated revenues and about $100 million in equity income in joint ventures, the largest being its 50% ownership of large Chinese supplier Yanfeng Visteon Automotive Trim Systems Co. Ltd. (nine-month 2010 revenue was $1.8 billion). Demand in the large North American market is slowly recovering. The European market is down about 6% from last year's levels, which is less than we expected. The Asian markets, particularly China, remain strong, but production in China during 2011 could be only in the mid-single digits, which is much slower growth than in recent years.
The stable outlook reflects our belief that Visteon can achieve positive discretionary cash flow in 2012, EBITDA margins in the upper single digits, and retain at least $500 million in cash. We estimate that this would require moderate revenue growth by 2012 and operating margins before depreciation of at least 7%.
We could lower the rating if it appears that the company would use more than $200 million in cash in 2011, including cash restructuring payments, if we believed discretionary cash flow generation would not be positive in 2012, or if we believed that debt to EBITDA, including our adjustments, would rise rather than stay flat or decline. For example, we estimate that adjusted debt to EBITDA could reach 2.5x if Visteon's gross margins fell by about 300 basis points on modest revenue growth.
We consider an upgrade less likely during the next year, based on our current assessment of business and financial risks and Visteon's limited financial and strategic record since emerging from Chapter 11. Still, any future upgrade would likely be based on whether we believe Visteon can sustain its margins and cash generation capabilities.
RELATED CRITERIA AND RESEARCH
Criteria | Corporates | General: Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
Key Credit Factors: Business And Financial Risks In The Auto Component Suppliers Industry, Jan. 28, 2009
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Media Contact:
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Analyst Contacts:
Robert Schulz, CFA, New York (1) 212-438-7808
Nancy C Messer, CFA, New York (1) 212-438-7672