Fitch Initiates Coverage of Delphi; Sr Unsec 'BBB', CP 'F2'.
NEW YORK--(BUSINESS WIRE)--Nov. 12, 2002
Fitch Ratings has initiated coverage of Delphi Corporation (Delphi) and assigned ratings of 'BBB' to the company's senior unsecured debt and unsecured bank facility and a rating of 'F2' to the company's commercial paper. The Rating Outlook is Stable.
Fitch's ratings for Delphi are based on the company's strong industry position, it's positive trend of growing its non-General Motors Corporation (GM) business, and its proactive restructuring activities. Negative factors include a potentially negative industry backdrop, Delphi's substantial pension issue, Delphi's current leverage to GM (65% of sales), a reliance on commercial paper (approaching 40% of outstanding debt), and potential labor cost increases associated with the Fall 2003 UAW contract negotiation.
Delphi has a strong industry position buoyed by a strong relationship with leading customer GM. GM, representing 65% of Delphi's sales, is currently enjoying robust production volumes led by their industry leading truck portfolio and aggressive pricing. Despite GM's relative strength, Delphi is actively de-linking themselves from GM in an attempt to diversify their customer base. Delphi has demonstrated great success in this initiative by gaining substantial business from other automakers. Recent product wins include a $2.5 billion diesel program with French automaker Renault and a $175 million power sliding doors and power liftgates for an Asian automaker. As a result of these efforts, Delphi's reliance on GM has shifted from 76.4% of sales in 1999 to a projected 65% of sales in 2002. Further shifts by GM to balance its supplier base, when combined with Delphi's substantial wins from other automakers should enable Delphi to achieve its long-term goal of reducing its reliance on any single customer to no more than 50% of sales.
Since its divestiture from GM, Delphi has undergone a significant period of restructuring. Beginning with an initial focus on programs with approximately $4-5 billion in calendar year 2000 sales, Delphi has evaluated its businesses with an eye on meeting their stated goals of 5% net income margins and 12.5% return on net assets. This effort has lead to two major restructuring efforts that have focused the company on achieving a portfolio of businesses that can each derive an adequate return. It is also important to note that Delphi has already expended all of its 2001 charge and a substantial portion of the 2002 charge ($179 million of $225 million). As a result, Delphi could benefit from lower future cash requirements due to these restructuring charges.
Despite these restructuring efforts and several small acquisitions, Delphi is focused on keeping credit metrics consistent with a 'BBB' or better long-term rating. Delphi maintains relatively good liquidity with $707 million of cash on hand (September 30, 2002) and $3 billion of available credit facilities ($2.5 billion of which is used to backup existing worldwide credit facilities, with approximately $1.3 billion of CP outstanding). The bank facilities come due for renewal in June 2003 ($1.5 billion, 364 day term) and June 2005 ($1.5 billion, 5 year term). In addition to these facilities, Delphi estimates that they $4 billion of investment grade receivables available for factoring.
Fitch believes that Delphi could be negatively impacted by the projected 2003 light vehicle build environment (Fitch estimates a 5-7% decline in US industry build rates and a 3-5% decrease in European build rates). Fitch believes that Delphi has more than sufficient liquidity to weather weaker markets and that Delphi could emerge from its continuing restructuring efforts (both the cost reduction and customer diversification efforts) a stronger company.
Delphi faces a substantial pension issue. Fitch estimates that Delphi's funding gap will widen from $2.4 billion at year-end 2001 to at least $3.5 billion by year-end. This increase in the funding gap will result in another substantial charge to other comprehensive income (Delphi took a $830 million charge to shareholder equity in 2001). Fitch's methodology, however, evaluates pensions in the context of a company's operating business. Delphi is expected to have the capacity to contribute $400-500 million a year for the next several years, making the issue manageable. Failure to be able to fund to this level, whether the result of operating performance or items such as acquisitions or share buyback, or a substantially negative 2003 equity market could be a potential ratings issue.
Although potentially of concern, Delphi's leverage to GM through the current market is not a negative factor. Over the last year, GM has demonstrated that it will sacrifice pricing to maintain relatively healthy share/volume levels. This is demonstrated in the year-to-date (YTD) sales numbers with GM helping, via negative net pricing, to drive US light vehicles sales towards 17 million units. Although questions remain about the long-term effectiveness of these tactics, GM also demonstrated in October that it could achieve satisfactory share levels even in a down market. In October, GM had a relatively strong share performance (29.8% share in October vs. the September YTD average of 28.1%) despite a relatively lower 15.4 million unit SAAR. GM's relatively good sales (and hence production) level directly benefits Delphi.
An additional concern is Delphi's reliance on commercial paper (CP). With approximately 40% of their outstanding debt being commercial paper, Delphi is subject to slightly higher funding risk. It should be noted, however, that the CP is principally used to fund working capital and that much of this funding is used to support highly liquid accounts receivable (which are readily factorable via methods such as GM's GECC facility). This funding risk is further mitigated by the quality of the receivables portfolio in that the majority of the receivables are from BBB+ or better rated credits. Other funding vehicles such as cash on hand and bank lines also provide an adequate level of protection against disruptions in the CP market. It should also be noted that Delphi has two CP facilities and that one is located in Europe. This facility has proven more resilient than the US facility and has enabled Delphi to continue to enjoy substantial access at relatively reasonable rates.
Also of concern is the upcoming UAW contract. Under the existing GM-Delphi agreement, Delphi will be forced to take GM's 2003 pattern agreement. Although this somewhat limits Delphi's flexibility, it must be noted that the UAW represents less than 20% of Delphi's hourly workforce and that GM will probably be seeking improvements in the contract that would benefit Delphi. It would not be unreasonable to see a contract similar to the recent CAW contract with further US-specific agreements focusing on healthcare and pensions.
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|Date:||Nov 12, 2002|
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