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Dayco Products, LLC -- Moody's upgrades Dayco's senior secured and CFR to Caa1; outlook positive

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Rating Action: Moody's upgrades Dayco's senior secured and CFR to Caa1; outlook positiveGlobal Credit Research - 01 Apr 2021New York, April 01, 2021 -- Moody's Investors Service, ("Moody's") upgraded Dayco Products, LLC's ("Dayco") corporate family rating (CFR) to Caa1 from Caa2, its probability of default rating (PDR) to Caa1-PD from Caa2-PD and the senior secured term loan rating to Caa1 from Caa2. The outlook is positive.The upgrade reflects Moody's expectation that improving end-market conditions, combined with sustainable operational efficiencies, will drive Dayco's financial leverage toward the mid-6x debt/EBITDA range by the end of its current fiscal year ending February 2022. In addition, Moody's anticipates Dayco to maintain adequate liquidity primarily supported by cash remaining in excess of $100 million. Dayco's improved liquidity and trajectory for deleveraging better position the company to address its near-term refinancing risks, specifically the company's secured term loan coming due in May 2023.Upgrades:..Issuer: Dayco Products, LLC.... Corporate Family Rating, Upgraded to Caa1 from Caa2.... Probability of Default Rating, Upgraded to Caa1-PD from Caa2-PD....Gtd Senior Secured Bank Credit Facility, Upgraded to Caa1 (LGD3) from Caa2 (LGD3) Outlook Actions: ..Issuer: Dayco Products, LLC ....Outlook, Changed To Positive From NegativeRATINGS RATIONALEDayco's ratings reflect the company's elevated financial leverage, modest scale relative to global competitors in its end markets, and refinancing risk with upcoming debt maturities. Following operational headwinds as a result of the coronavirus, Moody's expects Dayco's debt/EBITDA to be about 7.5x for the company's fiscal year, which ended February 2021. This leverage level remains high, although is improved from more unsustainable levels above 9x during the past twelve months. Moody's anticipates further deleveraging will occur to bring debt/EBITDA to around 6.5x by the end of February 2022. Higher earnings from recovering automotive demand and cost savings from consolidation in the company's manufacturing footprint should support the improvement in financial leverage to more sustainable levels as the company addresses its near-term debt maturities.Dayco maintains a good market position with a suite of engine and drivetrain products, including belts, tensioners and dampers, for top automotive manufacturers and aftermarket retailers. The company's aftermarket business, which represents about 40% of total revenue, provides a more stable demand base. In recent years, Dayco faced competitive pressures in this segment, which resulted in annual revenue declines and margin compression. Dayco demonstrated improving margins and resilient demand in the aftermarket segment over the course of 2020 through a focus on developing product kits, and Moody's expects this improvement to continue through 2021.Moody's expects Dayco to maintain adequate liquidity. The company's liquidity is primarily supported by its cash position, which Moody's expects will remain in excess of $100 million over the next twelve months. Dayco generated strong free cash flow during its fiscal year ending February 2021 from meaningful working capital and capex reductions. Moody's anticipates these trends to reverse during Dayco's current fiscal year and expects free cash flow will be slightly negative to breakeven.Dayco's increased cash position also reflects high borrowing under the company's $100 million asset-based (ABL) credit facilities. Availability under the facilities, which are set to expire in 2022, is expected to remain very limited, although borrowing capacity should increase as collateral levels recover.As an automotive supplier for both new vehicle production and aftermarket use, Dayco is exposed to material environmental risks arising from increasing regulations on carbon emissions. Dayco's products are heavily involved in the engines and drive systems of vehicles with a focus on improving fuel efficiency for internal combustion vehicles and providing quiet power transfer solutions for hybrid electric vehicles. Dayco will need to continue to develop products to meet the emission requirements for new electrified vehicles with its customers while also maintaining its existing product base for its sizable aftermarket exposure.The positive outlook reflects Moody's expectation for Dayco to continue to lower its financial leverage through earnings growth and to maintain adequate liquidity with near breakeven free cash flow generation.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings could be upgraded if Dayco successfully addresses its upcoming debt maturities and financial leverage is expected to be sustained below 6.5x on a go forward basis. In addition, Dayco would need to maintain an adequate liquidity profile with expectations for free cash flow to be moderately positive.The ratings could be downgraded if weaker earnings from a slower automotive recovery or inability to sustain operational efficiencies result in financial leverage remaining above 7.5x debt/EBITDA and reduces the likelihood that Dayco's upcoming maturities will be refinanced at par. A deterioration in liquidity from higher than expected negative free cash flow 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.Dayco, LLC, headquartered in Troy, MI, is a global manufacturer of engine technology solutions targeted at primary and accessory drive systems for the worldwide aftermarket, automotive Original Equipment (OE), and industrial end markets. Revenues for the last twelve month period ended November 30, 2020 were about $831 million. The company is owned primarily by a consortium of Oaktree Capital, Anchorage Capital Group, L.L.C. and TPG Capital.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. Mike Cavanagh 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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