U.S. markets open in 8 hours 10 minutes
  • S&P Futures

    3,928.00
    +30.25 (+0.78%)
     
  • Dow Futures

    31,395.00
    +193.00 (+0.62%)
     
  • Nasdaq Futures

    12,000.00
    +121.75 (+1.02%)
     
  • Russell 2000 Futures

    1,792.90
    +18.00 (+1.01%)
     
  • Crude Oil

    110.85
    -1.36 (-1.21%)
     
  • Gold

    1,840.30
    -0.90 (-0.05%)
     
  • Silver

    21.87
    -0.03 (-0.13%)
     
  • EUR/USD

    1.0582
    -0.0006 (-0.05%)
     
  • 10-Yr Bond

    2.8550
    0.0000 (0.00%)
     
  • Vix

    29.35
    -1.61 (-5.20%)
     
  • GBP/USD

    1.2461
    -0.0014 (-0.11%)
     
  • USD/JPY

    127.6800
    -0.1140 (-0.09%)
     
  • BTC-USD

    30,040.11
    +893.78 (+3.07%)
     
  • CMC Crypto 200

    669.56
    +17.33 (+2.66%)
     
  • FTSE 100

    7,302.74
    -135.35 (-1.82%)
     
  • Nikkei 225

    26,743.33
    +340.49 (+1.29%)
     

Garrett Motion S.a r.l. -- Moody's upgrades Garrett Motion Inc.'s CFR to Ba2 from Ba3; affirms Ba2 senior secured instrument ratings; outlook stable

·17 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

Rating Action: Moody's upgrades Garrett Motion Inc.'s CFR to Ba2 from Ba3; affirms Ba2 senior secured instrument ratings; outlook stableGlobal Credit Research - 18 Jan 2022Frankfurt am Main, January 18, 2022 -- Moody's Investors Service ("Moody's") has today upgraded the corporate family rating (CFR) of Garrett Motion Inc. ("Garrett" or "the company") to Ba2 from Ba3 and changed the company's probability of default rating to Ba2-PD from Ba3-PD. Concurrently, Moody's affirmed the Ba2 ratings on the guaranteed senior secured bank credit facilities of Garrett's wholly owned subsidiaries Garrett Motion S.a r.l. and Garrett LX I S.a r.l. The outlook on Garrett, Garrett Motion S.a r.l.and Garrett LX I S.a r.l.'s ratings is stable."The upgrade of Garrett's CFR reflects the de-leveraging stemming from the early redemption of $411 million subordinated debt instruments and the good operating performance with high cash generation in 2021.", said Matthias Heck, a Moody's Vice President -- Senior Credit Officer and Lead Analyst for Garrett. "The stable outlook reflects the expectation of a continued recovery in global light vehicle sales in 2022 and continued positive FCF generation, which will leave leverage below 3x on a sustained basis." added Mr. Heck.RATINGS RATIONALEOn 17 December 2021, Garrett announced the accelerated early redemption of $211 million of its Series B preferred stock as of 28 December 2021. In addition, Garrett plans to partially redeem additional shares of Series B preferred stock in 1Q 2022 for a corresponding cash payment of $200 million. The second partial redemption depends upon the availability of sufficient liquidity. Supported by continued positive free cash flow generation, Moody's expects that the company will not draw on its revolving credit facility (RCF) to maintain sufficient liquidity after the planned $200 million redemption in 1Q 2022.Garrett's operating performance was good in the first nine months of 2021. In a difficult sector environment, where global light vehicle sales declined by approximately 13%, the company's reported net sales increased by 4%, and its company-adjusted EBITDA increased by 12% to $134 million, implying a margin of 16%. For the full year 2021, the company expects sales of around $3.6-3.7 billion, up around 20% versus 2020, and a company-adjusted EBITDA of $590 -- 620 million, implying an EBITDA margin at a similar level to Q3 2021. The company also expects to generate $280 -- 340 million company-adjusted free cash flow in 2021. On a Moody's adjusted basis, the company's EBITA margin amounted to 13.2% in the last twelve months to September 2021.The debt redemptions will further de-lever Garrett. At the end of September 2021, the company's debt (Moody's adjusted) amounted to $2.0 billion and comprised $1.2 billion senior secured debt, $595 million Series B preferred stock, as well as debt adjustments for securitization and pensions. This resulted in a debt / EBITDA of 3.3x for the last twelve months to September 2021. The redemption of the $211 million in December 2021 reduced leverage to approximately 3.0x, and the second redemption in 1Q 2022 will reduce it further to approximately 2.7x, assuming no further improvement in EBITDA. Considering that the company emerged from Chapter 11 at the end of April 2021, the early redemption of debt illustrates a further improved financial strategy & risk management, which is reflected in the rating upgrade.The Ba2 rating balances (i) Garrett's market leading position in turbochargers for passenger and commercial vehicles, (ii) the increased market penetration of turbochargers globally, which should allow the company to outperform global light vehicle sales in the next few years, (iii) long-standing customer relationships with a diversified group of original equipment manufacturers (OEMs), and (iv) relatively strong margins (13.2% Moody's adjusted EBITA, at LTM September 2021), despite a highly competitive industry environment.Garrett's rating is constrained by (i) the ongoing automotive industry trends towards battery electric vehicles, although we believe internal combustion engines will retain a significant share of the vehicle powertrain in the current decade, (ii) a historically strong presence in light vehicle diesel engines in Europe, whereas vehicle demand is shifting toward gasoline engines, (iii) the exposure to the cyclicality of the automotive industry, and (iv) the company's leverage (3.3x Moody's adjusted debt/EBITDA as of September 2021), which is, however, expected to improve further.RATIONALE FOR THE OUTLOOKGarrett's stable rating outlook incorporates our expectation that the company's globally competitive position and strong profit margin will drive positive FCF generation, which will support debt reduction as the company's product mix shifts toward gasoline-powered engines. It also reflects our expectation of a continued recovery in global light vehicle sales in 2022 and 2023.LIQUIDITYMoody's considers Garrett's liquidity profile as good. At the end of September 2021, the company had $456 million cash on balance, and the $300 million revolving credit facility (RCF) was largely undrawn, and which was increased to $424 million in January 2022. The RCF is subject to a springing financial covenant (tested when at least 35% is drawn) and customary conditions to borrowing, including a "no-MAC" representation. Garrett has sufficient headroom to the covenant level of 4.7x gross leverage.We expect that Garrett will continue to generate positive free cash flow over the next four quarters. The company does not have any major short term debt maturities.The company's cash & cash equivalents plus available RCF amount to around $750 million as of September 2021 and are sufficient to cover working cash (we estimate 3% of revenues or around $110 million) and the proposed debt redemptions of $411 million. A further liquidity outflow could result from the execution of the $100 million share buyback programme.We note the company's announcement that the repayment of the $200 million Series B preferred stock will only be executed if the liquidity situation remains sufficient after the related cash outflow.STRUCTURAL CONSIDERATIONSGarrett issued the Series B preferred stock upon completion of its Chapter 11 financial restructuring on April 30, 2021. The Series B preferred stock had a present value of $595 million on September 30, 2021 and will be reduced to approximately $207 million as of March 31, 2022, following the completion of both transactions. Moody's considers the Series B preferred stock as subordinated financial debt, which ranks behind the other senior secured debt of the company.The credit quality of the secured instruments is not materially impacted from the redemption of large parts the subordinated debt instruments, so the Ba2 ratings are affirmed. With the upgrade, the CFR of Ba2 is now aligned with the senior secured instrument ratings, and the remaining relatively small amount of subordinated debt instruments does no longer give an uplift to the senior secured instrument ratings.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade to Ba1 would require a reduced exposure to products used for internal combustion engines only, including plug-in hybrids. Moreover, an upgrade would require Debt/EBITDA (Moody's adjusted) improving towards 2.0x, EBITA margin (Moody's adjusted) in the low teens in percentage terms, maintaining positive free cash flow generation in the high teens as percentage of debt, and maintenance of good liquidity.Garrett's ratings could be downgraded if Debt/EBITDA (Moody's adjusted) is sustained above 3.0x, EBITA (Moody's adjusted) margin trending below 10%, negative free cash flow generation, or a deterioration of liquidity.PRINCIPAL METHODOLOGYThe principal methodology used in these ratings was Automotive Suppliers published in May 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276105. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.COMPANY PROFILEGarrett Motion Inc. ("Garrett"), headquartered in Rolle, Switzerland, emerged from the spinoff of Honeywell's Transportation Systems business in October 2018. Garrett designs, manufactures and sells highly engineered turbocharger and electric-boosting technologies for light and commercial vehicle OEMs and the aftermarket. The company emerged from Chapter 11 in 2Q2021. Its shares are listed on the New York Stock Exchange. For 2020, the company reported revenue of $3.0 billion and EBITDA of $281 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. 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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Matthias Heck, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Anke Rindermann Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 © 2022 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. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS, AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing its Publications.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY’S.To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT RATING, ASSESSMENT, OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any credit rating, agreed to pay to Moody’s Investors Service, Inc. for credit ratings opinions and services rendered by it fees ranging from $1,000 to approximately $5,000,000. MCO and Moody’s Investors Service also maintain policies and procedures to address the independence of Moody’s Investors Service credit ratings and credit rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold credit ratings from Moody’s Investors Service and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. ​