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BorgWarner Inc. -- Moody's affirms BorgWarner's ratings with senior unsecured at Baa1, changes outlook to stable

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Rating Action: Moody's affirms BorgWarner's ratings with senior unsecured at Baa1, changes outlook to stableGlobal Credit Research - 26 Apr 2021New York, April 26, 2021 -- Moody's Investors Service (Moody's) affirmed the senior unsecured rating of BorgWarner Inc. (BorgWarner) at Baa1 as well as the short-term commercial paper rating at Prime-2. The rating outlook was changed to stable from negative.The rating action reflects Moody's expectation for the continued rebound in operating results as global light vehicle and commercial vehicle volumes recover through 2024. Financial leverage is elevated following the October 2020 acquisition of Delphi Technologies PLC (Delphi) and the financial impact of the pandemic-driven shutdowns. However, margins and free cash flow will benefit from improving operating leverage, prior cost-saving restructurings and higher content per vehicle from both combustion and electric vehicle awards. Cumulative cost synergies from the Delphi integration, estimated at $175 million in aggregate, should also help preserve margins.RATINGS RATIONALEBorgWarner's ratings reflect its strong market position as a Tier 1 supplier of automotive engine and drivetrain products and emission controls, and related parts, that help improve vehicle performance, propulsion efficiency, stability and air quality. This product focus should help sustain the company's track record of outperforming global automotive industry production trends through 2022. A growing backlog of products supporting vehicle electrification is also expected to contribute to solid revenue growth over the next several years. Moody's anticipates BorgWarner to remain a leading provider of combustion products over the next decade, although vehicle propulsion will steadily transition to hybrid and pure electrification. In response to this industry migration, BorgWarner is accelerating its electrification capabilities highlighted by recent acquisitions, Delphi and Akasol AG (Akasol), which is pending.Balancing the transition from higher return, but declining, combustion-related revenues with the transition to currently unprofitable, but higher growth, electric vehicle revenues remains the primary risk to the company's operating model. Good execution, including combustion divestitures and the use of proceeds, will be key to preserving the rating position.BorgWarner's leading market position is heavily reliant on combustion-related revenues (electric vehicle revenues currently less than 5% of total revenues). As a result, the automotive industry's accelerated transition to electric propulsion has created significant execution risk as the company attempts to pivot to large-scale electrification capabilities. The company's move to electrification requires higher R&D and capital investments, challenging return metrics. Management's plan to shed $3 billion - $4 billion of non-core, but still profitable, combustion revenues by 2025 could also pressure margins until electric vehicle volumes drive greater scale and generate profitability. As seen with Delphi and Akasol, this transition will require significant resources, including potentially adding debt, to help fund acquisitions.Moody's expects debt-to-EBITDA (including Moody's standard adjustments) to remain high (above 2x) given the business risk through 2022 but to demonstrate significant improvement from the current mid-3x range as industry volumes continue recovering. The EBITA margin should approach 11% by year-end 2022, boosted by improved operating leverage and ongoing cost management actions. Free cash flow-to-debt is expected to settle in the low-double digit range over the next couple of years before accelerating to the mid-teens.The stable outlook includes Moody's expectation that the global recovery of automotive vehicle volumes will continue through 2022, leading to improved returns and strong free cash flow. The stable outlook also anticipates that the integrations of Delphi and recently announced Akasol will proceed to plan, generating projected revenue and cost synergies to help restore balance sheet flexibility.BorgWarner's liquidity is strong, supported by Moody's expectations for a run-rate cash position (majority held by subsidiaries outside of the US) comfortably in excess of $1 billion and significant availability under a $2 billion revolving credit facility (undrawn at year-end 2020) set to expire March 2025. Additionally, Moody's anticipates free cash flow (cash flow from operations less capital expenditures less dividends) of at least $500 million in 2021 and 2022, inclusive of restructuring outlays, and greater investment in working capital and capital expenditures to meet sustained top-line growth. The company had zero outstanding under the $2 billion commercial paper program, backstopped by the revolving credit facility, at December 31, 2020. With the expectation of solid free cash flow, Moody's anticipates only modest usage of this program over the next 12-18 months.Moody's took the following rating actions on BorgWarner Inc.:- Senior Unsecured Regular Bond/Debenture, affirmed at Baa1- Senior Unsecured Commercial Paper, affirmed at P-2Outlook, changed to Stable from NegativeFACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded with an EBITA margin sustained above 15% due to outsized organic revenue growth and accelerated progress in generating profitable electric vehicle revenues. Moody's expectations for debt-to-EBITDA to be sustained comfortably below 1.5x and free cash flow-to-debt in excess of 15% could also support positive rating action. Maintenance of the strong liquidity profile would also be an important consideration for a higher rating.The ratings could be downgraded if the EBITA margin remains below 10% by year-end 2022, potentially due to less effective cost management or delayed progress in improving the profitability of new electric vehicle awards. Debt-to-EBITDA remaining above 2.25x into late-2022 could also result in negative rating action.While still heavily reliant on combustion revenues, BorgWarner is proactively positioning itself to address environmental risks from increasing regulations on carbon emissions in the automotive industry. As automotive manufacturers introduce more electrified powertrains, traditional internal combustion engines will become smaller and fewer in number. BorgWarner is aggressively adapting its product offerings to meet this propulsion transition.BorgWarner maintains a balanced governance profile between its debt and equity holders. The company has a track record of positive free cash flow sufficient to invest in R&D and capital expenditures, supplemented with strategic acquisitions, to support growth to meet automotive industry trends while balancing shareholder returns with a steady dividend and expectations for relatively modest share repurchases.The principal methodology used in these ratings was Automotive Supplier Methodology published in January 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1170606. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.BorgWarner Inc. provides clean and efficient technology solutions for combustion, hybrid and electric vehicles with products improving vehicle performance, propulsion efficiency, stability and air quality.Revenues for the year ended December 31, 2020 were approximated $10.2 billion, $12.7 billion on a pro forma basis including Delphi Technologies PLC.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Eric Greaser Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Robert Jankowitz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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