S&P sees U.S. suppliers' growth slowing

Standard & Poor’s expects earnings growth to slow at U.S. auto suppliers the rest of the year and into 2013, but most should not suffer credit quality downgrades because of it.

The lag in earnings will be caused by overseas business risks, the corporate credit ratings agency said.

“Following the Great Recession, these companies benefited from higher auto production after the multidecade lows of late 2008 and early 2009,” S&P credit analyst Nishit Madlani wrote in a report last week. “Most successfully reduced their break-even sales volumes while improving their credit ratios, building up their cash balances, and refining debt.”

Since August 2009, S&P has raised its ratings on nearly 75 percent of U.S. auto suppliers, but ratings on about one-third of them are still lower than they were in March 2008.

The report confirms what the Original Equipment Suppliers Association, a supplier trade group, has been hearing from its members.

Although costs were cut dramatically as the industry downsized during the recession, North American light-vehicle production has climbed about 71 percent from 2009 to 2012, OESA President Neil De Koker said in an interview.

“Things are very good for most suppliers in North America,” De Koker said. “Suppliers are being very careful about adding additional capacity and overhead.”

Suppliers at the greatest risk are those most exposed to Europe, where the industry is riddled with excess factory capacity and light-vehicle demand is slumping.

“This will continue to put significant pressure on profitability of the entire automotive sector in Europe until these adjustments are executed,” De Koker said.

Sweden’s Autoliv, which makes seat belts, airbags and other car safety equipment, said last week that the European market has been worse than anticipated in the third quarter while the U.S. market has been better than expected, according to Reuters.

NEW YORK (Standard & Poor's) Sept. 20, 2012--Growing global economic risks will likely slow earnings growth among U.S. auto suppliers for the remainder of this year and into 2013, but most should sidestep any significant deterioration in their credit quality, according to a recent report published by Standard & Poor's Ratings Services.

"Following the Great Recession, these companies benefited from higher auto production after the multidecade lows of late 2008 and early 2009," said Standard & Poor's credit analyst Nishit Madlani. "Most have successfully reduced their break-even sales volumes while improving their credit ratios, building up their cash balances, and refinancing debt."

Since August 2009, Standard & Poor's has raised its ratings on nearly 75% of the rated U.S. auto suppliers and have assigned stable outlooks to most, although its ratings on about one-third are still lower than they were in March 2008.

The steps U.S. auto suppliers have taken to strengthen their businesses have given most companies some cushion in their ratings under Standard & Poor's current base-case scenario, which calls for continued improvement in North American auto sales and production, a gradual recovery in sales and production in Europe following a decrease in new-vehicle registrations of at least 6% in 2012, and some industry growth in South America and Asia.

"Under our base case, revenue growth for large (Tier 1) auto suppliers should remain positive, on average, into 2013," Mr. Madlani said. "Profit margins for these companies have been solid, and credit measures are meeting or exceeding our expectations for nearly all issuers with stable outlooks. This should provide some cushion against tougher macroeconomic conditions affecting the industry."

Standard & Poor's also evaluated how well this cushion would hold up under the impact of a hypothetical downside scenario for 2013, which assumes a 10%-15% decline in revenue and a 150- to 200-basis-point drop in adjusted EBITDA margins from its 2012 expectations.

"We believe certain U.S. auto component companies could face downgrades or negative outlook revisions if a marked downturn, especially in Europe, were to last for two years--particularly if economic contagion spilled over to other regions," Mr. Madlani said. "Companies that are most at risk for downgrades are suppliers of commodity parts with limited geographic or customer diversity or those with specific operational challenges, such as large restructuring charges related to underperforming assets or earnings pressure from unrecovered raw-material cost hikes."

The full report, "U.S. Auto Suppliers Could Largely Weather Slowing Global Economic Growth," was published Sept. 19, 2012, on RatingsDirect on the Global Credit Portal.

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