Commercial Vehicle Group, Inc. -- Moody's affirms Commercial Vehicle Groups ratings at B2; revises outlook to stable

Rating Action: Moody's affirms Commercial Vehicle Groups ratings at B2; revises outlook to stableGlobal Credit Research - 10 Mar 2021New York, March 10, 2021 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Commercial Vehicle Group, Inc. (CVG), including the corporate family rating (CFR) at B2, the senior secured rating at B2, and the probability of default rating (PDR) at B2-PD. The outlook has been revised to stable from negative.The actions are based on Moody's expectation that favorable end market conditions will support the restoration of CVG's credit profile over the course of 2021 to pre-pandemic levels, including debt/EBITDA returning near 3x and EBITA margins in the mid-single digit range. Moody's believes strong protection in the company's debt metrics is critical to withstand the inherent cyclicality from exposure to Class 8 truck production. In addition, the company's lower leverage profile and adequate liquidity should support CVG's ongoing strategy shift to increase its business mix towards more stable revenue sources, specifically e-commerce warehouse automation supply.The following rating actions were taken:Affirmations:..Issuer: Commercial Vehicle Group, Inc..... Corporate Family Rating, Affirmed B2.... Probability of Default Rating, Affirmed B2-PD....Senior Secured 1st Lien Bank Credit Facility, Affirmed B2 (LGD4)Outlook Actions:..Issuer: Commercial Vehicle Group, Inc.....Outlook, Changed To Stable From NegativeRATINGS RATIONALECommercial Vehicle Group's ratings, including the B2 CFR, reflect the company's modest scale, exposure to highly-cyclical end-markets and customer and geographic concentrations in its business. Moody's expects CVG's revenues to increase at least 15% in 2021 following a decline of about 20% in 2020 as production for Class 8 trucks in North America recovers significantly. CVG's exposure to heavy and medium-duty truck production decreased to 35% of its business in 2020 from about half in 2019, and the company has a good market position providing seating systems, trim and wire harnesses to a concentrated group of customers.Moody's expects CVG to maintain its competitive position as a key trucking supplier going forward, but recognizes the ongoing shift in the company's strategic efforts, especially with newer executive management in place, to focus the business on more stable revenue sources with high long-term growth prospects. These sources include a build-out of its warehouse automation systems, which the company entered through its late-2019 acquisition of First Source Electronics, and last mile delivery vehicles. Favorable trends in e-commerce support the growth in these areas. However, competition for warehouse automation supply is expected to be intense with many larger, traditional manufacturing companies having entered the space in recent years.CVG has historically demonstrated a disciplined approach to managing its balance sheet with low levels of funded debt and moderate leverage ahead of anticipated cyclical downturns given its trucking exposure. Moody's expects the company to maintain this approach with leverage improving to near 3x debt/EBITDA in 2021 as favorable end market conditions persist. As CVG diversifies its exposure away from trucking, there is the potential for the company change its financial policy to tolerate higher leverage as its revenue sources become more predictable.The stable outlook reflects Moody's view that CVG will maintain moderate leverage with debt/EBITDA in the 3x range and adequate liquidity with positive free cash flow as the company continues its ongoing shift to diversify away from its core trucking business.CVG's SGL-3 liquidity rating reflects Moody's expectation for an adequate liquidity profile through 2021 supported by cash ($51 million at the end of December 2020, although a substantial portion is outside the US) and modestly positive free cash flow of about $10 million expected during 2021. CVG's liquidity is further supported by a $90 million asset-based facility (ABL), which is expected to remain undrawn. Following an amendment to its term loan covenants during 2020, Moody's anticipates the company to maintain significant cushion with its leverage covenant and $40 million minimum liquidity test.ESG CONSIDERATIONSThe company's role in the commercial vehicle industry exposes it to environmental risks arising from increasing regulations on carbon emissions, particularly as it relates to its end customers. Moody's views CVG's risk to be manageable with certain opportunities in its electrical systems segment to contribute to trends toward longer-term electrification of commercial vehicles.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if CVG maintains sufficient financial flexibility in its credit metrics to both withstand inherent volatility in its primary end market and expand its presence in growing business areas, specifically warehouse automation. This financial flexibility can be measured by the company maintaining EBITA margins in the high-single digit range and sustaining debt/EBITDA below 3.5x.The ratings could be downgraded if CVG's liquidity position deteriorates from an inability to generate positive free cash flow or availability on its asset-based facility is significantly reduced. The expectation for debt/EBITDA to be sustained above 5x could also pressure the rating.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.CVG is a global provider of components and assemblies into two primary end markets -- the global vehicle market and the U.S. technology integrator markets. The company provides components and assemblies to global vehicle companies to build original equipment and provides aftermarket products for fleet owners. The company also provides mechanical assemblies to warehouse automation integrators and to U.S. military technology integrators. Revenue for the twelve months ending December 2020 was $718 million.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. 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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. Mike Cavanagh Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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