Although affirming its ‘B’ corporate credit rating on Meritor, Standard & Poor’s Ratings Services (S&P) has revised its outlook on the company down to stable from positive. The outlook revision essentially reflects S&P’s opinion that Meritor’s credit profile will not support a higher corporate credit rating in fiscal 2013.
The ratings agency noted that sales have been falling for most of Meritor’s major geographical markets in fiscal 2012, and it expects this weakness to extend into fiscal 2013. S&P expects commercial vehicle production in North America to rise 10-20% in 2012, with production declining about 10% in Europe and at least 20% in South America.
S&P forecasts that Meritor’s revenue will be about US$4.5bn and the adjusted EBITDA margin about 8% in fiscal 2012, noting that while the company has improved its operational performance by rationalising its European footprint and implementing better commodity cost recovery mechanisms, it remains concerned that economic activity will remain weak in Europe and Latin America in 2013.
As a result, S&P does not expect the company’s leverage to decline to 4x in fiscal 2013, which would support a higher rating.
For the 12 months ended 30 June 2012, EBITDA interest coverage was 3.0x, and adjusted debt to EBITDA was 6.1x. S&P expects leverage to stay above 5x at the end of fiscal 2012 and above 4x by the end of fiscal 2013.
S&P believes Meritor has “adequate” sources of liquidity to cover its needs in the near term, even in the event of unforeseen EBITDA declines. Liquidity sources include, as of 30 June 2012, US$226m in cash and cash equivalents, a US$429m revolving credit facility, and a US$100m US accounts receivable securitisation facility.
