Fitch Takes Ratings Action on Certain U.S. Auto Suppliers

NEW YORK--Fitch Ratings has taken the following ratings actions on certain U.S. auto suppliers:

American Axle

--Issuer Default Rating (IDR) is affirmed at 'CCC', removed from Rating Watch Negative and assigned a Stable Outlook;

ArvinMeritor

--IDR 'CCC' remains on Rating Watch Negative;

Tenneco

--IDR is affirmed at 'B-', removed from Rating Watch Negative and assigned a Stable Outlook;

TRW Automotive

--IDR is affirmed at 'B-', removed from Rating Watch Negative and assigned a Stable Outlook.

A full list of the ratings is detailed at the end of this release.

Today's rating action concludes the Rating Watch that was initiated on Dec. 11, 2008 due to concerns about possible bankruptcies by General Motors (GM) and Chrysler LLC (Chrysler); following the bankruptcies by the two automakers, the Rating Watch remained in effect due to concerns about post-bankruptcy vehicle volumes at GM and Chrysler. ArvinMeritor remains on Rating Watch Negative for separate matters as discussed below. Both GM and Chrysler emerged from Chapter 11 and the extended production shutdowns are complete. Furthermore, the auto supply base has not faced serious disruptions despite some bankruptcies such as Hayes-Lemmerz International, Lear Corporation, Metaldyne Corp. and Visteon Corp. While the Rating Watch has been removed, Fitch views the global automotive environment as challenging in the near term and on a longer term basis, the suppliers should benefit from the significant restructuring actions taken before and during the global automotive slump.

Fitch continues to believe that North American vehicle sales volumes will improve in the second half of 2009 versus the first half of the year. Drivers for the modest improvements against the first half are the government's 'Cash for Clunkers' program which is nearly completed; aggressive vehicle pricing; consumers' access to vehicle financing which was difficult to obtain in the early part of 2009; and a reduction in dealer inventories. With higher production volumes, auto suppliers will be using cash for working capital needs in the second half of the year, and Fitch expects most suppliers should have adequate liquidity while production ramps up. Fitch believes this to be the case given that many suppliers have amended financial covenants to ensure access to revolving credit facilities. American Axle is currently trying to obtain covenant relief as well as other modifications to its credit agreement to ensure its access to liquidity as discussed below.

Looking ahead to 2010, Fitch continues to see gains in vehicle sales in North America which should enable the suppliers to gain operating efficiencies; in Europe vehicle sales are likely to decline. Fitch expects to see free cash flow to be negative for many suppliers; it may be another year in which many suppliers restrict capital expenditures. Balance sheets for the auto suppliers are likely to remain damaged for some time.

--American Axle: Fitch has removed the 'CCC' IDR from Rating Watch Negative and assigned a Stable Outlook to American Axle. The actions are based on Fitch's expectation that the company will succeed in finalizing two key related items: 1) an agreement with GM; and 2) an amendment with lenders. Both will need to occur to ensure that the company maintains access to liquidity. If both are completed, the company will receive a one-time payment of $110 million from GM. Furthermore, GM will offer American Axle a $100 million delayed-draw second lien term loan which extends through 2013 and American Axle can also receive expedited payments through the end of 2013. In return, American Axle will offer warrants to GM which will be up to 19.9% of its common shares (7.4% initially and up to an additional 12.4% if American Axle draws on the second lien term loan); it will also agree to an access and security agreement.

These two items are expected to be completed by the end of August given that American Axle has received a second extension to its waiver and amendment which extends through Aug. 31, 2009. Fitch expects that lenders would be willing to consent to modifications to the credit agreement.

As of June 30, 2009, American Axle's liquidity was $285 million consisting of $284 million in cash and equivalents and $1 million of availability on its revolving credit facility. The company was not in compliance with covenants as of June 30 and as a result, it drew down nearly all of the revolver. The secured revolver provides commitments of $476.9 million through April 2010. After that, the commitment is reduced to $369.4 million and expires in December 2011. Aside from the reduction in the size of the revolver in 2010 and its final maturity in 2011, American Axle does not have any debt maturities until its $250 million term loan is due in 2012.

Fitch projects that American Axle will not generate free cash flow in 2009 following the negative free cash flow of $322 million in 2008, despite significant improvement and flexibility to its fixed cost structure. Capital expenditures are expected to be $140 million - $150 million, which would be flat to slightly higher than the $140 million spent in 2008. Dividends were suspended in January 2009 and cost-cutting efforts were made before and during the global automotive slump.

Additional headwinds will come from the company's need to make pension and other retirement plan contributions in 2009. At the end of 2008, American Axle's pension plan was 55% funded, or $255 million underfunded. The company expects funding requirements to be $20 million in 2009. Other post-retirement obligations are expected to require $15 million of funding.

--ArvinMeritor: ArvinMeritor's 'CCC' rating remains on Rating Watch Negative given Fitch's view that the company continues to face significant risks in its ability to execute the divestiture of the remaining assets in the light vehicle segment which have been a significant use of cash, the potential need for an amendment for covenant relief for the quarter ending Sept. 30, 2009, and ongoing weakness in truck demand in Europe. Fitch notes that ArvinMeritor has made some progress divesting assets in the light vehicle segment but concerns remain about shedding the rest of the assets given the cash burn from the segment and the company's potential for needing an amendment.

Fitch expects that operating losses and restructuring costs will produce negative cash flows in 2009. Liquidity as of June 30, 2009 was $532 million consisting of $456 million of availability on the credit facility and $76 million of cash. ArvinMeritor has indicated that it requires $75 million to $100 million of liquidity for operations, and Fitch believes that even if this estimate proves to be conservative, ArvinMeritor's liquidity should be adequate for the near term provided lenders grant covenant relief on the credit agreement, if required.

ArvinMeritor has no debt maturities until the bank agreement matures in 2011 and the company's pension is moderately underfunded in dollar terms. At the end of the last measurement date (June 30, 2008), it was underfunded by $115 million (or 7%). Given the performance of the equity markets since then, Fitch expects to see the underfunded status increase, which could require incremental contributions over the next several years.

--Tenneco: The company's IDR of 'B-' has been removed from Rating Watch Negative and a Stable Outlook has been assigned. Fitch believes that the company has appropriate covenants for the challenging automotive environment, a diverse product offering and geographic distribution. In 2008, the company received approximately 20% of its revenues from GM and 2% from Chrysler. Like other suppliers, Tenneco felt the impact of the extended production shutdowns; however, with the production restarts at the auto makers and Tenneco's restructuring efforts, profits should improve in the second half of 2009 versus the first half.

Liquidity as of June 30, 2009 was $444 million consisting of $333 million of availability on its credit facility and cash of $111 million. Liquidity excludes availability on the U.S accounts receivable program as well as the European accounts receivable programs, some of which can be canceled with 30 days notice. Furthermore, Tenneco once again can use receivables from GM and Chrysler in its $100 million U.S. accounts receivable program; this facility extends through February 2010. Importantly, the company does not have any significant debt maturities until 2012 when $700 million of the $830 million of the credit facility expires. Tenneco has a $249 million underfunded pension plan, which due to losses in the equity and fixed income markets in 2008, is likely to require incremental contributions over the near term. At the end of 2008, the pension plan's funding status was 59%.

--TRW Automotive: Fitch has affirmed the 'B-' rating and removed the Rating Watch Negative. A Stable Outlook has also been assigned. The actions reflect improved operating performance, the recent equity issuance, a credit agreement amendment, and significant liquidity. In 2008, GM and Chrysler accounted for 13.5% and 9.6%, respectively, of TRW's sales globally in 2008. TRW recently raised equity and net proceeds were $269 million, all of which was earmarked for debt reduction. One-third of the net proceeds, or $89 million, was used to reduce the term loans while the balance was used to lower borrowings on the revolving credit facility.

Liquidity at the end of the recent quarter was $1,476 million consisting of $905 million of credit facility availability and $571 million of cash. In June 2009, the company's credit agreement was amended and its financial covenants were reset for the more challenging automotive environment. Despite the termination of the U.S. accounts receivables securitization facility, a net decrease in European factoring facilities, and Fitch's expectation for negative cash flow in 2009, Fitch estimates that the company's liquidity profile should be sufficient over the near term.

TRW has no near-term debt maturities and the revolver extends through 2012. The company's $600 million Term Loan A has required amortization of $54 million in 2010, $120 million in 2011, $225 million in 2012 and $150 million in 2013. TRW's $500 million Term Loan B also amortizes and requires payments of $2.75 million in 2009 and $0.5 million a year until the final payment in 2014.

For more details on the auto suppliers, please see Fitch's report 'Liquidity Focus: U.S. Auto Suppliers', dated June 9, 2009. Readers should note that since that publication date, TRW Automotive was downgrade by one notch as noted in the TRW Automotive press release dated June 30, 2009.

Fitch affirms the following ratings:

American Axle & Manufacturing, Inc.

--IDR 'CCC';

--Senior secured bank facility 'B-/RR3';

--Senior unsecured notes 'C/RR6';

--Outlook Stable.

American Axle & Manufacturing Holdings, Inc.

--IDR 'CCC';

--Outlook Stable.

Tenneco

--IDR 'B-';

--Senior secured bank facility 'B+/RR2';

--Senior secured second lien notes 'CC/RR6';

--Senior unsecured notes to 'CC/RR6';

--Subordinated notes 'CC/RR6';

--Outlook Stable.

TRW Automotive Holdings Corp.

--IDR 'B-;

--Outlook Stable.

TRW Automotive, Inc.

--IDR 'B-';

--Secured bank facility 'B+/RR2';

--Senior unsecured notes 'CC/RR6';

--Outlook Stable.

The following rating remains on Rating Watch Negative:

ArvinMeritor

--IDR 'CCC' and on Rating Watch Negative;

--Secured 'B/RR1';

--Senior unsecured 'CC/RR5'.

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.