Fitch Downgrades Tenneco Automotive Inc.'s Debt Ratings
8 November 2000
Fitch Downgrades Tenneco Automotive Inc.'s Debt Ratings
NEW YORK--Nov. 7, 2000--Fitch lowers the ratings on Tenneco Automotive's (TEN) senior secured bank facilities to `BB-' from `BB'.Its senior unsecured debt rating is also lowered to `B+' from `BB-', and its subordinated debt rating is lowered to `B' from `B+'. The Rating Outlook is Stable. The rating actions are prompted by Tenneco's impaired operating performance and reduced financial flexibility against a leveraged financial position. Several factors have combined to cause earnings to fall short of expectations, including industry-wide weakness in the aftermarket, unexpected plant shutdowns at major automakers, and a sharp decline in heavy-duty truck production. Credit ratios are also being negatively impacted in foreign currency translation by the weakness of the Euro. The rating continues to be supported by TEN's good revenue balance between the original equipment (OE) and aftermarkets, and leading market positions in its North American ride control and exhaust system products. TEN also has a good geographic footprint, with almost one-half of sales being generated outside of North America.
Although Tenneco has succeeded in reducing its absolute debt levels by over $100 million since it was spun off into a stand-alone company in November 1999, shortfalls in earnings have resulted in leverage ratios that are somewhat higher than the original ratings had anticipated. Debt/EBITDA at 9/30/2000 is substantial at over 4 times (x) excluding charges for restructuring activities, while pro forma interest coverage for the twelve months ended 9/30/2000 is thin at 2.1x. While benefits of new restructuring plans and cash flow conservation should allow these measures to strengthen through 2001, improvement will be gradual and there is the potential for aftermarket weakness to continue.
Although results have been lower than expected, management has made significant progress in achieving many of its strategic goals since November 1999 when TEN was spun off from Tenneco, Inc. TEN has grown its market share in both ride control and exhaust, despite an overall down aftermarket, largely supported by a strong flow of new products and successful product repositionings. TEN has also added new business in adjacent markets and continues to build strategic alliances to its expanded growth platforms outside of North America, most recently announcing alliances with Futaba and Tokico, the leading exhaust and ride control manufacturers in Japan. From a financial perspective, TEN has completed restructuring actions in 1998 and 1999, resulting in $30 million of savings in fiscal 2000.
In the face of challenging industry conditions, management has outlined new restructuring plans to reduce selling, general, and administrative (SGA) expenses and further improve TEN's cost structure. As well, focus on scaling back capital expenditures and significant improvements in working capital are expected to augment free cash flow throughout 2001. While Fitch believes that these actions are achievable and that management remains committed to improving TEN's credit profile, of concern to Fitch is that despite these efforts, TEN's earnings are dependent on a very difficult 2001 operating environment as aftermarket and OE conditions are likely to remain depressed or slowdown from record levels.