Garrett Motion S.a r.l. -- Moody's assigns Ba3 rating to Garrett Motion; outlook stable

Rating Action: Moody's assigns Ba3 rating to Garrett Motion; outlook stableGlobal Credit Research - 22 Feb 2021Frankfurt am Main, February 22, 2021 -- Moody's Investors Service ("Moody's") has today assigned a Ba3 corporate family rating (CFR) and Ba3-PD probability of default rating to Garrett Motion Inc. ("Garrett" or "the company"), as well as a Ba2 rating to the senior secured bank credit facilities expected to be entered into by Garrett's wholly owned subsidiaries Garrett Motion S.a r.l. and Garrett LX I S.a r.l. with Garrett Motion Holdings, Inc. being a co-borrower. The outlook on all ratings is stable."The Ba3 rating reflects the strength of Garrett's underlying operating business and a successful balance sheet restructuring, which will allow the company to emerge from Chapter 11 in the second quarter of 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 2021, leading to positive FCF generation and continued debt reduction." added Mr. Heck.RATINGS RATIONALEOn 11 January 2021, Garrett announced that it selected an enhanced proposal from a consortium led by Centerbridge Partners, L.P. ("Centerbridge") and funds managed by Oaktree Capital Management, L.P. ("Oaktree"), along with Honeywell International Inc. ("Honeywell") and holders of a majority of Garrett's common stock, to reorganize the company and emerge from Chapter 11 in Q2 2021. According to the plan, Garrett's existing creditors will be repaid in full in cash with proceeds from debt and equity financing (other than Honeywell, which has agreed to reduce and convert its claims into subordinated preferred equity exclusively under the plan).The newly raised debt is expected to consist of a $1,250 million seven-year guaranteed senior secured Term Loan B and a $300 million guaranteed senior secured revolving credit facility. Approximately $1,251 million Convertible Series A preferred equity provided by Centerbridge, Oaktree, and certain other investors will be considered equity, according to Moody's criteria. The capital structure will resolve the indemnity obligations and a tax matters agreement with Garrett's previous owner Honeywell, via an upfront cash payment and the issuance of a new Series B Preferred Equity instrument, with annual payments beginning after emergence from Chapter 11 and concluding in 2030 (unless deferred or repaid earlier) that have a total net present value of around $584 million. The Series B Preferred Equity instrument is considered subordinated debt, according to Moody's criteria.The Ba3 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 (Moody's adjusted EBITA), despite a highly competitive industry environment.Garrett's rating is constrained by (i) the company's focus on rebalancing its product mix toward light vehicle gasoline engines in recent years, with an expectation of further growth, (ii) a historically strong presence in light vehicle diesel engines in Europe, whereas vehicle demand is shifting toward gasoline engines, (iii) ongoing automotive industry developments in electric vehicles, although we believe internal combustion engines will retain a significant share of the vehicle powertrain well into the current decade, and (iv) somewhat elevated leverage, which is, however, expected to improve gradually.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 2021 and 2022.LIQUIDITYWe consider Garrett's liquidity profile as good. Upon emergence from Chapter 11, Garrett is expected to have around $100 million of unrestricted cash on balance, supported by a $300 million undrawn revolving credit facility. The RCF is expected to be subject to a springing financial covenant (tested when at least 35% is drawn) and customary conditions to borrowing, including a "no-MAC" representation. We expect Garrett to have sufficient headroom to the expected covenant level of 4.7x gross leverage. We expect funds from operations (FFO) of at least $250 million over the next four quarters.These total liquidity sources of at least $650 million over the next four quarters to March 2022 should be sufficient to cover cash uses for working cash (we estimate 3% of revenues or around $100 million), potential further minor negative changes in working capital as well as capex of around $120 million. The company does not have major short-term debt maturities.STRUCTURAL CONSIDERATIONSThe instrument ratings incorporate our EMEA approach within the Loss Given Default Analysis, which includes treating trade payables as pari passu with the most senior secured debt, based on the expected approach in the reorganization. Under this approach, the secured rating of Ba2 reflects an uplift due to the subordinated Series B Preferred Equity instruments owed to Honeywell.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSAn upgrade would require establishing an operational and financial track record post emergence from Chapter 11. More specifically, an upgrade would require Debt/EBITDA (Moody's adjusted) sustainably below 3.0x, 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 there is a significant decline in automotive demand, and the company is unable to continue to win new profitable turbo business on gasoline powered engines as the industry mix shifts away from diesel, resulting in future strained revenue. More specifically, a downgrade could result from Debt/EBITDA (Moody's adjusted) sustained above 4.0x, 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 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.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. Post emergence from Chapter 11, its shares are expected to be relisted 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. 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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 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. 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