Tier I auto suppliers’ liquidity in focus amid chip shortage – Market React
Handicapping cash flow for Tier 1 auto suppliers can been a tricky exercise, given their direct exposure to the semiconductor shortage plaguing the auto industry. Still, a number of these Tier 1 players are armed with robust liquidity coffers, which is helping to keep trading levels from capsizing, according to two sources following the situation.
But there are some exceptions. The most distressed supplier on investors’ radars is Cooper-Standard Automotive, which faces a heightened cash burn as the chip shortage only serves to compound its earnings pressure, the sources said.
Also on the radar are American Axle & Manufacturing, Tenneco, Adient and Dana Inc.
“The point is that people need cars, so these suppliers should be fine throughout the semiconductor shortage,” one of the sources said.
But the liquidity profile for those suppliers such as Cooper-Standard – who have not diversified their products – could experience a further cash drain, sources added. Of note, Cooper-Standard has significant exposure to the OEM market with roughly 83% of its 2020 sales coming from OEMs and 54% of 2020 total sales coming from its three largest customers: Ford Motor Company, General Motors Company and Fiat Chrysler Automobiles
AlixPartners last month released a report, forecasting that the semiconductor shortage will cost the global auto industry USD 210bn in 2021 revenue, compared to its previous expectations in May of USD 110bn. On the vehicle front, the firm is now expecting production to lose 7.7m units, compared to 3.9m in the May forecast.
Sources predict that the shortage could run its course by 1Q22 to 2Q22. But a new forecast by IHS Markit says the auto industry won’t enter a recovery phase until the 1H23, according to press reports. The semiconductor shortage has resulted in a 7.4m unit loss of light vehicle production year-to-date, without factoring the loss in 4Q21, according to an IHS Markit report from 5 October.
To offset the effects of the shortage, the OEMs cleared existing inventory during the first half of the year and now plan to direct production to their higher-end and more profitable models, cushioning the suppliers from a larger blow to free cash flow, sources noted.
“It’s when the more popular cars like Ford’s F150 production shuts down that it would be bad,” one of the sources said.
In response to the chip shortage, both GM and Ford have shut down factories, laid off workers and slashed vehicle production. Each company expects up to a USD 2bn hit in sales for 2021, according to company documents.
GM expects to withhold or cut production of about 200,000 vehicles in North America during 2H21, compared to its previous expectation of 100,000. Ford said in April that it expects the semiconductor shortage to cause production losses of about 1.1 million vehicles this year, for a revenue loss of about USD 2.5bn.
The industry upheaval has weighed on Cooper-Standard, which is now expected to burn more cash than previously envisioned. The bearish prognosis has resulted in a double-digit yield for its unsecured notes.
On an LTM basis, as of 30 June, Cooper-Standard, which manufactures sealing, fuel and brake delivery, and fluid transfer systems, burned USD 4.5m of cash through USD 145m of adjusted EBITDA less USD 84.5m of capex less USD 65m of interest expense.
The auto products supplier was poised for a rebound this year amid a recovery for light vehicle volumes. But now management has pulled back guidance due in part to the semiconductor shortage, the sources said.
For 2021, the auto products supplier is now expected to report a cash drain of USD 170m-USD 220m, compared to earlier estimates of a USD 75m-USD 130m cash burn, as reported.
Liquidity totaled USD 452.6m through USD 117.1m ABL availability and USD 335.5m of cash. Total leverage shook out at 7.26x through USD 145m of LTM adjusted EBITDA and USD 1.053bn of total debt.
Cooper-Standard’s USD 400m 5.625% senior unsecured notes due 2026 last traded on 24 September at 81.5 to yield 10.361%, compared to trades at 84.125 to yield 9.565% in early September and 91.05 to yield 7.72% in August, according to MarketAxess.
Comparatively, Adient, which supplies automotive seats, generated USD 628.35m of cash through USD 1.086bn of adjusted EBITDA less USD 254m of capex less USD 203.65m of interest expense.
Liquidity totaled USD 1.853bn through USD 1bn of cash and USD 853m of revolver availability. Leverage shook out to 3.4x through USD 3.712bn of total debt and USD 1.086bn of adjusted EBITDA.
Adient’s USD 797m 4.875% senior unsecured notes due 2026 traded Thursday (7 October) at 102.375 to yield 3.891%, in line with recent levels, according to MarketAxess.
Both Dana Inc and American Axle manufacture axles for internal combustion engines, which could become less popular as OEs transition to electric cars, at least on the passenger side, the sources said. Additionally, sources pointed out that OEs don’t want to pay for in-sourcing the manufacturing while they’re in the process of phasing out the combustion engines.
Case in point, Ford announced that it and a South Korean supplier plan to spend USD 11.4bn to build three battery factories and an electric truck plant in the United States, according to a 27 September release. Ford and GM alike hope to be zero-emission by 2030.
To insulate itself from seismic changes to the industry, Dana has diversified its offerings to include motors, power inverters and control systems for electric vehicles, providing the company with a buffer to withstand the transition, the sources added.
On an LTM basis, Dana generated USD 416m of cash through USD 860m of adjusted EBITDA less USD 340m of capex less USD 104m of interest expense.
As of 30 June, liquidity totaled USD 1.513m through USD 384m of cash and USD 1.129bn of revolver availability. Leverage shook out to 2.8x through USD 2.4bn of total debt and USD 860m of adjusted EBITDA.
American Axle’s free cash flow totals USD 669.7m through USD 1.044bn adjusted EBITDA less USD 192.4m of capex and USD 182m of interest expense.
As of 30 June, liquidity totaled USD 1.48bn through USD 587.7m of cash and USD 895.2m of revolver availability. Leverage shook out to 3.13x through USD 3.27bn of total debt and USD 1.04bn of adjusted EBITDA.
Dana’s USD 400m 4.25% senior unsecured notes due 2030 traded on 6 October at 102.77 to yield 3.825%, down from trades last month at 104.5 to yield 3.572%, according to MarketAxess.
American Axle’s USD 600m 5% senior unsecured notes due 2029 traded on 6 October at 96.75 to yield 5.506%, compared to trades in September at 98.75 to yield 5.19%, according to MarketAxess.
Sources also pointed out that Tenneco, which manufactures performance solutions, clean air and powertrain products and systems, is one to keep an eye on with the delayed separation of businesses.
Part of the company’s strategy following its acquisition of Federal-Mogul was to split the company in two by mid-2020: an aftermarket and ride performance business and a powertrain technologies business.
The timing of the separation is now unclear, and the company is also looking at other options such as potential asset sales.
The aftermarket and ride performance businesses are expected to stay important as OEs address emission regulations and grow production levels. Meanwhile, the powertrain business could face long-term pressures as OEs transition away from the internal combustion engine.
Tenneco generated USD 980.6m of cash through USD 1.54bn of adjusted EBITDA less USD 307m of capex less USD 254.4m of interest expense.
As of 30 June, liquidity totaled USD 2.2bn through USD 719m of cash and USD 1.5bn of revolver availability. Leverage shook out to 3.3x through USD 5.08bn of total debt and USD 1.54bn of adjusted EBITDA.
Tenneco’s USD 500m 5% senior unsecured notes due 2026 traded Thursday (7 October) at 97.934 to yield 5.497%, compared to trades last month at 100.5 to yield 4.807%, according to MarketAxes.
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