Autokiniton US Holdings Inc. Downgraded To 'B' On Impact From The Coronavirus; Ratings Placed On CreditWatch Negative

  • The coronavirus pandemic is likely to weigh on North American supplier Autokiniton US Holdings Inc.'s (AGG's) sales and profit margins in 2020.
  • We expect a sharp drop in sales in the second quarter due to potentially extended production shutdowns by key customers, which will weaken free operating cash flow to debt to well below 5% for 2020 and possibly 2021.
  • We are therefore lowering our issuer credit rating on AGG to 'B' from 'B+'. We are also lowering our issue-level ratings on the company's existing senior secured debt to 'B' from 'BB-' and revising the recovery rating to '3' from '2'. The '3' recovery rating indicates our expectation for average (50%-70%; rounded estimate: 50%) recovery for lenders in a default scenario.
  • The CreditWatch placement with negative implications reflects our view that in the near term, AGG's credit metrics and liquidity could be further hurt by the effects of the pandemic in North America, absent financial sponsor actions to protect liquidity or positive effects of government stimulus packages.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above.
Cash flow adequacy metrics will weaken significantly in 2020, and our prior base case had assumed limited headroom for downside risk related to integration costs amid an economic slowdown.  S&P Global recently lowered its forecast for global light-vehicle sales as the coronavirus pandemic escalates and global growth falls. We now project U.S. auto sales could decline up to 20% in 2020, and we expect global automakers and suppliers will face intense credit pressures, which will test their liquidity management and the headroom in their credit metrics. Despite Autokiniton US Holdings Inc.'s (AGG's) modest debt burden, following its acquisition of Tower International Inc., we now expect debt to EBITDA to remain well over 5x over the next two years, with free operating cash flow (FOCF) to debt below 5%. Our prior expectation was debt to EBITDA of about 3.5x-4x and FOCF to debt of 5%-10%. As the uncertainty around production shutdowns intensifies, the lower credit quality reflects the exposure to a fiercely competitive auto industry that is marked by cyclical demand and elevated pricing pressure.
The CreditWatch placement with negative implications reflects our view that in the near term, AGG's credit metrics and liquidity could be further hurt by effects of the coronavirus pandemic in North America, absent financial sponsor actions to protect liquidity or positive effects of government stimulus packages. We could lower the rating if production stoppage appears likely to extend deep into the second quarter, which could augment cash burn and weaken liquidity.
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