Fitch Rates BorgWarner's Proposed Notes 'BBB+'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BBB+' to BorgWarner Inc.'s (BWA) proposed $1 billion issuance of senior unsecured notes. The Issuer Default Rating (IDR) for BWA is 'BBB+' and the Rating Outlook is Stable.

The proposed notes will be issued in two tranches, a $500 million 10-year tranche and a $500 million 30-year tranche. Proceeds from the proposed notes will be used to term-out outstanding borrowings on BWA's commercial paper (CP) program and for general corporate purposes. At year-end 2014, BWA had $461 million outstanding on its CP program. Although the proposed notes will increase BWA's leverage, Fitch expects leverage (debt/Fitch-adjusted EBITDA) to remain in the low 1x range following the issuance, which remains consistent with the company's ratings.

KEY RATING DRIVERS

BWA's ratings are supported by the company's strong competitive position as a key global supplier of engine and drivetrain components, significant free cash flow (FCF) generation potential, solid consolidated liquidity position and low leverage. BWA managed through the last economic downturn relatively well, and with a product portfolio largely focused on technologies that enhance fuel efficiency, such as turbochargers and dual-clutch transmission components, its sales growth is likely to continue outpacing global auto production over the intermediate term. In addition, efficient capacity utilization and a focus on cost control have resulted in profitability that is high for the industry, contributing to strong FCF generation and providing the company with significant financial flexibility.

A primary rating concern is the relatively small amount of cash that BWA has been maintaining in the U.S. Consolidated liquidity at year-end 2014 included $798 million in cash and cash equivalents, but only $1.8 million of that cash was in the U.S. About 76% of BWA's revenue in 2014 was generated outside the U.S. Although the company has a need to maintain a significant level of cash outside the U.S. to fund its sizeable non-U.S. operations and to potentially fund overseas acquisitions, it appears that the company has been increasingly tapping its CP program to partially fund its U.S. operations and to pay for dividends and share repurchases. As noted above, a portion of the proceeds from the proposed issuance will be used to refinance BWA's CP balance on a long-term basis. At year-end 2014, BWA had $461 million in CP outstanding. Following the issuance of the proposed notes, Fitch expects the company will not have a need to raise incremental debt in the near term. However, there is a risk that leverage could rise further over time if the company continues to borrow to fund its U.S. activities. An increase in EBITDA leverage (debt/Fitch-calculated EBITDA) above 1.5x for an extended period could result in a negative rating action.

Other concerns include BWA's ongoing interest in acquisitions, which could result in higher leverage, and an increased focus on shareholder-friendly activities. BWA recently announced a $1 billion three-year share repurchase program, a meaningful increase following a total of $661 million in share repurchases over the past three years. The company also reinstated its dividend in mid-2013 and paid a total of $116 million in dividends in 2014. These concerns are mitigated somewhat by the company's consistently positive FCF generation. FCF totaled $102 million in 2014 even after the company increased capital spending by $145 million to support its substantial book of future business.

Despite the increase in shareholder-friendly activities, BWA's credit profile remains among the strongest in the U.S. auto supply sector. EBITDA leverage at year-end 2014 was only 0.9x, with $1.3 billion in debt and full-year EBITDA of $1.4 billion. Fitch expects leverage will rise to around 1.3x following the issuance of the proposed notes. Funds from operations (FFO) adjusted leverage was 1.6x at year-end 2014. BWA's consolidated liquidity position is strong, although as noted, nearly all of its $798 million in cash was outside the U.S. at year-end 2014. In addition to its cash, BWA has access to a $1 billion unsecured revolver which backs its $1 billion CP program. The company's next significant debt maturity is in November 2016 when $150 million in senior unsecured notes come due.

KEY ASSUMPTIONS

--Global economic conditions improve at a moderate pace, leading to low-single-digit growth in global auto production;

--BWA's revenue growth continues to outpace growth in global auto production;

--Annual capital spending runs between 5% and 6% of revenue over the next few years;

--Cash not used for acquisitions is used to fund share repurchases;

--Dividends grow annually over the intermediate term;

--No material debt reduction over the next several years.

RATING SENSITIVITIES

BWA's 'BBB+' IDR indicates that a near-term upgrade of the company's ratings is unlikely. Typically, the inherent cyclicality and potential financial pressures of the auto supply industry result in a soft cap on IDRs at the 'BBB+' level, although in rare cases a supplier with a very strong business profile and unusually strong credit protection metrics could be considered for the 'A' category.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--An unexpected sharp drop in global auto production;

--An increase in leverage to above 1.5x for an extended period;

--A decline in the company's EBITDA margin to below 12%;

--A significant increase in long-term debt to support shareholder-friendly actions.

Fitch currently rates BWA as follows:

--Long-term IDR 'BBB+';

--Short-term IDR 'F2';

--Unsecured credit facility rating 'BBB+';

--Senior unsecured notes rating 'BBB+';

--CP rating 'F2'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage (May 28, 2014);

--BorgWarner Inc. - Ratings Navigator (Nov. 26, 2014).

Applicable Criteria and Related Research:

BorgWarner, Inc. - Ratings Navigator

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=819888

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980982

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Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1 312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1 212-908-0310
or
Committee Chairperson
David E. Peterson
Senior Director
+1 312-368-3177
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
[email protected]
Elizabeth Fogerty, +1 212-908-0526
[email protected]

Source: Fitch Ratings

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