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TEXT-Fitch revises Tenneco's outlook to positive
March 14, 2012 / 5:12 PM / 6 years ago

TEXT-Fitch revises Tenneco's outlook to positive

March 14 - Fitch Ratings has affirmed the 'BB' Issuer Default Rating
(IDR) and the various issue ratings of Tenneco Inc. (TEN). In addition,
Fitch has assigned a rating of 'BBB-' to TEN's proposed $700 million secured
revolving credit facility and proposed $250 million secured term loan A. A full
list of the rating actions taken on TEN is provided at the end of this release.
Fitch has revised TEN's Rating Outlook to Positive from Stable.	
	
The revision of TEN's Rating Outlook to Positive reflects Fitch expectations
that the auto supplier's credit profile will continue to strengthen over the
intermediate term as global auto sales continue to grow and demand for the
company's emission control technologies remains strong. In particular,
increasingly stringent regulations governing commercial truck and off-highway
vehicle emissions will provide additional growth opportunities outside of TEN's
traditional light vehicle market. Primary risks to the company's credit profile
include industry cyclicality, volatile raw material costs and increasing
gasoline prices, although the decline in the company's cost structure and its
stronger balance sheet have improved its ability to withstand another downturn
in global auto demand.	
	
The proposed $700 million secured revolving credit facility will replace TEN's
current $622 million revolving credit facility ($66 million of which will
terminate later this month) and its $130 million tranche B-1 letter of
credit/revolving loan facility. The proposed $250 million term loan A will
supplement the company's existing $148 million term loan B, which is anticipated
to remain in place. Proceeds from the proposed $250 million term loan A will be
used to tender for the TEN's $250 million in 8.125% senior unsecured notes due
2015. The company commenced its tender offer for these notes on March 8, 2011.
The new revolver will mature in 2017, versus 2014 for the existing revolver and
tranche B-1 facility (although the existing revolver would mature in December
2013 if the tranche B-1 facility had not been refinanced prior to that). The new
term loan A also matures in 2017, while the existing term loan B continues to
have a 2016 maturity.	
	
Provided all of the proposed transactions are completed as contemplated, TEN's
overall debt level is expected to be about the same, although its
intermediate-term maturity profile will be more favorable, with no significant
maturities until 2016, and annual interest expense will likely be meaningfully
lower. Replacing the unsecured notes with the new secured term loan A increases
the amount of secured debt in the capital structure ahead of the remaining
unsecured notes. However, by entering into a term loan, rather than issuing new
notes, TEN will have increased flexibility to de-lever its balance sheet by
prepaying the term loan debt without penalty, which could ultimately benefit
TEN's bondholders.	
	
The 'BBB-' rating assigned to TEN's current and proposed secured credit
facilities, two notches above the IDR, reflects the facilities' collateral
backing, which includes virtually all of the company's U.S. assets, as well as
up to 66% of the stock of TEN's first-tier foreign subsidiaries. The credit
facilities also are guaranteed on a secured basis by TEN's material U.S.
subsidiaries. The 'BB-' rating assigned to the company's unsecured debt, one
notch below the IDR, reflects the substantial amount of secured debt in the
company's capital structure. Fitch notes that, pro forma for the new credit
facility and the redemption of the 8.125% unsecured notes, if TEN were to fully
draw on its revolving credit facility, over half of the company's debt would be
secured.	
	
Fitch expects TEN will continue to see demand for its products outpace overall
vehicle production due to its strong position in the global emission control and
ride control segments. Worldwide, emission regulations in most major auto
markets continue to tighten, and are becoming increasingly stringent for
commercial trucks and off-highway construction equipment, as well. In addition,
tightening regulations for locomotives and marine equipment present further
opportunities to diversify the company's revenue stream. TEN estimates that up
to 35% of its original equipment revenue will be driven by commercial vehicle
and off-highway business by 2015, nearly tripling versus about 12% in 2011. This
level of growth, on top of the expected rise in global light vehicle production,
could lead to a doubling the company's original equipment revenue over the next
five years. Combined with the permanent changes to the company's cost structure,
including new or expanded manufacturing facilities in a number of low-cost
countries, Fitch expects higher business levels to support margins at or above
current levels over the intermediate term.	
	
In 2011, TEN's credit profile strengthened as a result of its improved operating
performance, while its debt level remained roughly flat. As of Dec. 31, 2011,
TEN's leverage (balance sheet debt/Fitch-calculated EBITDA) stood at 2.0 times
(x), down from 2.3x at year-end 2010, while total debt of $1.2 billion was
virtually unchanged. Free cash flow of $32 million in 2011 was weaker than the
$93 million produced in 2010 as a result of higher capital spending and
increased cash used for working capital as business levels increased. Fitch's
calculation of funds flow from operations (FFO) adjusted leverage was 3.4x at
year-end 2011, up from 3.0x at year-end 2010, reflecting primarily an increase
in rent expense and off-balance sheet European securitization debt. Although
revenue increased 21% in 2011 to $7.2 billion, margins declined somewhat on
higher costs, including increased material and engineering expenses. Fitch's
calculated EBITDA margin declined to 8.5% in 2011 from 8.9% in 2010. Liquidity
remained strong, however, with $214 million in cash and access to the
aforementioned credit facilities, while short-term debt maturities (including
current maturities of long-term debt) totaled only $66 million.	
	
Over the intermediate term, Fitch expects TEN's metrics to strengthen as the
company benefits from improving market conditions, new business wins and
continued discipline on controllable costs, all of which will lead to higher
margins and free cash flow. Fitch's projects that leverage will decline during
2012 and could fall further, potentially to below 1.5x, by year-end 2013 if the
company targets its free cash flow toward modest debt reduction. Fitch expects
free cash flow to remain solidly positive over the intermediate term, even with
increased capital spending to support new programs coming on line over the next
several years.	
	
The funded status of TEN's global pension plans declined in 2011, with the plans
only 67% funded at year-end 2011 versus a 74% funded status at year end 2010. In
the U.S., TEN's plans were only 58% funded at Dec. 31, 2011, versus a funded
status of 68% at the end of 2010. As with many corporate plans, the lower funded
status was primarily due to the decline in long-term interest rates, with TEN
using a 4.8% discount rate to value its projected benefit obligation in 2011. In
2010, the company used a 5.6% discount rate. Despite the underfunded status, on
a dollar basis, TEN's global plans were only underfunded by $255 million ($175
million in the U.S.), which Fitch believes is manageable, given the company's
liquidity position and free cash flow prospects. TEN has estimated that required
cash contributions to its global pension plans will be $48 million in 2011, up
from $45 million in 2010.	
	
The greatest risk facing TEN's credit profile in the near term is the potential
for a slowing of the global economy and the resulting decline in vehicle
production. This risk is partially offset, however, by the company's
increasingly diverse customer base, lower cost structure, and the increasingly
stringent regulatory environment, which will continue to drive the market for
emission control solutions regardless of global economic conditions. In
addition, a lack of meaningful debt maturities until 2017, assuming the proposed
capital structure transactions are successfully completed, further helps to
mitigate near-term liquidity risk in a weakened demand environment. Rising fuel
prices also present a risk to the extent that they could result in a decline in
overall vehicle demand, as well as cause a demand shift toward smaller vehicles
that are less profitable for TEN, and higher raw material costs could put
additional pressure on TEN's margins. Fitch notes, however, that TEN passes
along a substantial portion of its material costs to its original equipment
customers, although offsetting higher material costs in the aftermarket could be
more difficult.	
	
Fitch could upgrade TEN's IDR to 'BB+' in the intermediate term if global
vehicle production continues to grow and ongoing demand for the company's
products leads to a further strengthening of its credit metrics. On the other
hand, Fitch could revise the Rating Outlook back to Stable if global vehicle
production growth slows or declines as a result of a weakening in the world
economy, causing a meaningful deterioration in the company's credit metrics over
a prolonged period. Any debt-financed acquisitions or shareholder-friendly
actions that result in a significant increase in leverage also could prompt a
negative rating action.	
	
Fitch has taken the following rating actions on TEN:	
	
--Issuer Default Rating (IDR) affirmed at 'BB';	
--Proposed secured revolving credit facility assigned at 'BBB-';	
--Proposed secured term loan A assigned at 'BBB-';	
--Secured term loan B affirmed at 'BBB-';	
--Existing secured revolving credit facility and tranche B-1 facility affirmed
at 'BBB-';	
--Senior unsecured rating affirmed at 'BB-';	
--Rating Outlook revised to Positive from Stable.	
	
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable Criteria and Related Research:	
	
--'Corporate Rating Methodology' (Aug. 12, 2011);	
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(May 12, 2011);	
--'Evaluating Corporate Governance' (Dec. 13 2011).	
	
Applicable Criteria and Related Research:	
Corporate Rating Methodology	
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers	
Evaluating Corporate Governance

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