Delco Remy International Upgraded by S&P; $130 Million Senior Notes Rated B+
4 December 1997
Delco Remy International Upgraded by S&P; $130 Million Senior Notes Rated B+
NEW YORK, Dec. 1 -- Standard & Poor's today assigned its
single-'B'-plus rating to Delco Remy International Inc.'s $130 million
senior notes due 2007.
At the same time, Standard & Poor's raised its corporate credit rating on
the company to double-'B'-minus from single-'B'-plus, and its subordinated
debt rating to single-'B' from single-'B'-minus.
The rating on the company's revolving credit facility that expires in
2004, which has been increased to $180 million from $150 million, was raised
to double-'B' from double-'B'-minus.
The security interest in substantially all of the company's assets offers
reasonable prospects for full recovery of principal. It is anticipated that
the company would retain value as a business enterprise in the event of a
bankruptcy. Delco Remy's cash flows were severely discounted to simulate a
default scenario and capitalized by an earnings before interest, taxes,
depreciation, and amortization (EBITDA) multiple reflective of its peer group.
Under this simulated downside case, collateral value is sufficient to fully
cover the bank facility if a payment default were to occur.
The upgrades reflect an improvement in Delco Remy's business and financial
profiles. Delco Remy has strengthened its business profile over the past year
through acquisitions and investments, which have broadened the company's
product, geographic, end market, and customer diversity. The company also has
improved its financial profile through restructuring actions -- which have
improved operating performance -- and through a planned initial public
offering that will expand the company's sources of capital. The stock
offering is expected to close concurrently with the senior note offering.
Delco Remy produces electrical, powertrain/drivetrain, and related
components for cars, heavy duty trucks, and other heavy duty vehicles. The
company was formerly General Motors Corp.'s (GM) automotive starter, heavy-
duty starter, and alternator business. Delco Remy was acquired from GM in
July 1994 in a leveraged buyout. Since then, new management has been
increasing the company's aftermarket focus, primarily through acquisitions.
In fiscal 1997 (year ended July 31) aftermarket sales accounted for about 45%
of net sales and 63% of EBITDA. This compares with 19% of sales and 47% of
EBITDA in fiscal 1995. Management also has been improving operating
efficiency by moving production to small, focused manufacturing facilities.
Together, the increased emphasis on higher margin aftermarket sales and
improved operating efficiency have led to improved operating margins over the
past year.
Further improvement is expected over the near to intermediate term as the
company continues to shift production to lower cost facilities. Funds from
operations to debt is expected to improve to the mid-teen percentage area this
year and to approach 20% in subsequent years. EBITDA interest coverage is
expected to approach 3 times in 1997 and remain at or above this level. Delco
Remy is expected to continue to pursue acquisitions to further its
diversification efforts. However, investment activity is not expected to
cause a deterioration in credit quality.
OUTLOOK: STABLE
Cyclical and competitive industry conditions likely will prevent a
significant improvement in the company's financial profile over the next three
years. Downside risk is limited by prospects for improved financial
performance over the near to intermediate term, Standard & Poor's said. --
CreditWire
SOURCE Standard & Poor's CreditWire