Clarios Global L.P.'s Rating Lowered To 'B' Due To Higher-Than-Expected Debt Leverage; Outlook Stable

  • Due to the impact from the coronavirus pandemic, we expect double-digit light-vehicle production declines in the U.S., Europe and China. Together with the decreased volume, we see operational efficiencies arising and ongoing restructuring costs pressuring EBITDA as well. Consequently, we believe Clarios Global L.P.'s debt leverage will remain significantly above 7x in 2020.
  • We are lowering our issuer credit rating on the company to 'B' from 'B+'. The outlook is stable.
  • We are also lowering our issue-level ratings on the company's secured debt to 'B' from 'B+' and on its unsecured debt to 'CCC+' from 'B'. The recovery rating on the secured debt is '3', reflecting our expectation of meaningful (50%-70%; rounded estimate: 50%) recovery in the event of default. The recovery rating on the unsecured debt is '6', reflecting our expectation of negligible (0%-10%; rounded estimate: 5%) recovery in the event of default.
  • The stable outlook reflects our view that the company will generate positive free operating cash flow over the next 12 months.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions listed above.
Because of the supply-side and demand-side shock from the coronavirus pandemic, we now expect double-digit, light-vehicle production declines in the U.S., Europe and China.  More specifically, we see light-vehicle demand falling 15%-20% in the U.S. and Europe and 8%-10% in China. Together with the decreased volume, we see operational efficiencies arising and ongoing restructuring costs pressuring EBITDA as well. Consequently, we believe debt leverage will remain significantly above 7x in 2020.
The stable outlook on sponsor-owned Clarios reflects our view that the company will continue to generate positive free operating cash flow over the next 12 months.
We could lower our ratings if the company appeared unlikely to reduce debt leverage toward 7x by the end of 2021 due to a greater-than-expected fall in demand from OEM and aftermarket customers as a result of a decline in miles driven or a drop in consumer confidence, thus weakening EBITDA margins. Moreover, we could lower the rating if the company began to generate negative free operating cash flow generation over the next 12 months, thereby draining liquidity and undermining its ability to invest sufficiently in its business.
We could raise the ratings if the company showed solid operational performance and realized targeted cost savings, as demonstrated by expanding margins. Moreover, we would expect to see the company lower its debt to EBITDA to or below 6.5x and generate a ratio of free operating cash flow to debt above 3% on a sustained basis.
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