TEXT-Fitch upgrades TRW Automotive IDR to ‘BBB-’

May 01 2012

TEXT-Fitch upgrades TRW Automotive IDR to ‘BBB-’

March 22 – Fitch Ratings has upgraded the issuer default ratings (IDRs) of
TRW Automotive Holdings Corp. (TRW) and its TRW Automotive, Inc. (TRW
Automotive) subsidiary to BBB- from BB+. Simultaneously, Fitch has affirmed
TRW Automotives senior secured credit facility rating at BBB- and upgraded
TRW Automotives senior unsecured rating to BBB- from BB+. A full list of
the rating actions taken on TRW and TRW Automotive is included at the end of
this release. Fitchs ratings apply to a $1.0 billion secured revolving credit
facility and $1.4 billion in senior unsecured notes. The Rating Outlook for both
TRW and TRW Automotive is Stable.

The upgrade in TRWs ratings is driven by the further fundamental strengthening
of the companys credit profile that has taken place over the past year.
Although light vehicle sales in the companys key North American and Western
European markets remain well below pre-recession levels, TRW has been able to
post relatively high margins and revenue growth throughout the post-recession
period. This has led to strong free cash flow generation that the company has
used to strengthen its balance sheet by reducing debt, increasing liquidity and
improving the funded status of its pension plans. Looking ahead, Fitch expects
TRW to continue producing positive free cash flow over the intermediate term,
despite increased capital spending, which will provide the company with
meaningful financial flexibility. While there are several identifiable risks,
Fitch believes that TRW has the financial strength to withstand several negative
developments while retaining an investment grade profile.

The greatest risk facing TRWs credit profile in the near term is the potential
for another slowing of global auto production. However, this risk is mitigated
somewhat by the companys globally diverse customer base and significant
presence in key technology areas, especially in safety-related components. TRWs
relatively heavy exposure to Europe, with nearly half of the companys revenue
generated in the region, is of particular concern, although Fitch notes that
Volkswagen AG, Europes strongest volume manufacturer, is TRWs largest
customer. As noted above, TRW produced positive free cash flow through the last
downturn, and the company is better positioned to withstand another demand shock
in the intermediate term with its lower cost structure and stronger balance
sheet. The lack of meaningful debt maturities until 2014 also helps to mitigate
near-term risk. Fitch also notes that TRW Automotives credit agreement and
notes indentures contain change of control covenants that could provide
protection to investors in the case of a leveraged buyout, although the language
carves out The Blackstone Group and its affiliates from these provisions.

In addition to economic concerns, the potential for a significant adverse
outcome resulting from antitrust investigations currently underway is another
meaningful risk. The investigations appear to be related to several suppliers
European operations and involve TRWs Occupant Safety Systems business. Although
few details have been disclosed, the company noted that it spent $25 million on
its own investigation into the matter in 2011 and is likely to incur further
expenses as its internal investigation continues. Fitch notes that
investigations such as these can, at times, take years to resolve, so there may
not be a near-term resolution to the matter. When more information becomes
available regarding any financial penalties that may arise from the
investigation, Fitch will evaluate the effect on the companys credit profile.
TRWs substantial liquidity position and free cash flow generation potential
will help to absorb the effect of any cash outlays related to the
investigations.

TRW has mentioned publicly that it may consider increasing the amount of cash it
returns to shareholders, either through an increase in share repurchases or,
potentially, a dividend. However, Fitch does not expect any increase in
shareholder-friendly activity to meaningfully affect the underlying credit
quality of the company. In addition, management has noted that it will only
consider increasing the amount of cash it returns to shareholders once there is
more clarity around demand strength in Europe, as well as the antitrust
investigations.

TRWs strong market position as a leading supplier of advanced vehicle safety
systems has helped to propel top line growth at a faster rate than the increase
global vehicle production. In 2011, the companys revenue grew 13% versus global
vehicle production growth of about 3%. Combined with an ongoing focus on cost
control and production efficiency, TRW has been able to produce relatively
strong margins on a consistent basis, even through the last recession. The
companys EBITDA margin in 2011 (as calculated by Fitch) came to 10.6%, down
from a relatively high 11.9% in 2010 but still among the stronger margins in the
auto supplier sector. This has led to robust free cash flow generation, and
Fitch notes that the company was able to produce a total of $545 million in free
cash flow during the industry downturn in 2008 and 2009. Free cash flow came to
$549 million in 2011 despite TRW spending $571 million on capital expenditures.
Operating cash flow in both 2010 and 2011 came to about $1.1 billion per year,
and Fitch notes that these figures include $170 million and $100 million of
discretionary pension contributions made in 2010 and 2011, respectively.

As noted above, TRW has been focused on deploying its free cash flow to
strengthen its balance sheet. In particular, the company has looked for
opportunities to reduce its outstanding debt in the post-recession period by
repaying all of its bank debt and opportunistically repurchasing portions of its
outstanding notes. Since year-end 2007, TRWs debt has declined by $1.7 billion,
including a decline of $339 million in 2011, resulting in a debt balance of $1.6
billion at Dec. 31, 2011. (Note that Fitchs adjusts TRWs exchangeable notes to
their face value when calculating the companys debt-related metrics.) With
EBITDA rising, the decline in debt has led to a significant reduction in TRWs
leverage, with the company ending 2011 with leverage (debt/Fitch-calculated
EBITDA) of only 0.9 times (x), down from 1.1x at year-end 2010 and 2.8x at
year-end 2008.

Liquidity also remains quite strong, with $1.2 billion of cash and cash
equivalents and $991 million of availability on the companys secured revolver
(after accounting for $29 million of outstanding letters of credit and bank
guarantees) at year end 2011, leading to $2.2 billion in total available
liquidity. Near-term debt maturities are light, with only $65 million in
short-term debt and $39 million in current maturities of long-term debt coming
due in 2012. TRWs next significant debt maturity is in 2014, when $550 million
of senior unsecured notes mature.

Looking ahead, Fitch expects TRWs revenue to be about flat in 2012 as
production in the companys key European market declines, production growth at
the Detroit Three slows and growth rates cool in emerging markets, such as
China. Nonetheless, TRWs margins are expected to remain relatively strong, with
Fitchs calculated EBITDA margin expected to remain above 10%, although it may
be down slightly from the 2011 level. Capital spending is expected to grow by
about $100 million in 2012 to support new business programs and international
growth, but free cash flow is nonetheless expected to remain positive and
sufficient to provide the company with further financial flexibility. The pace
of additional debt reduction is likely slow in 2012 as Fitch expects TRWs
options for opportunistic debt purchases are becoming more limited. Over the
longer term, Fitch expects the companys business prospects will remain
favorable, with stronger revenue, margin and free cash flow growth tied to an
eventual improvement in European auto market conditions, as well as ongoing
penetration into less mature markets like China, India and South America.

On a consolidated basis, TRWs global pension plans were 101% funded at year-end
2011, although this was due to a significantly overfunded position (according to
US GAAP accounting) in the companys UK pensions. In the US, TRWs
pensions were 75% funded, however, with a benefit obligation of $1.3 billion and
plan assets of $957 million. On a dollar basis, the underfunded position of the
US plans was only $327 million at year-end 2011, which Fitch believes is
manageable given TRWs liquidity position and free cash flow generation
potential. As noted above, TRW made significant voluntary cash contributions to
its plans in each of the past two years, and the company could elect to make
further discretionary contributions to its plans over the intermediate term.

The harmonization of TRW Automotives secured credit facility rating with the
companys IDR and senior unsecured rating reflects provisions in the facility
that allow for the collateral to be released when the company is assigned an
investment-grade rating from certain rating agencies. Although the conditions
necessary to release the collateral have not yet been met, Fitchs rating for
the facility incorporates the potential that the company could have the option
to release the collateral in the near to intermediate term.

Fitch could revise TRWs rating outlook to Positive or upgrade the ratings in
the intermediate term if the global automotive market remains healthy and the
company continues to use free cash flow to strengthen its balance sheet. On the
other hand, a meaningful slowdown in the global automotive market that leads to
margin pressure and reduced free cash flow could lead Fitch to revise the Rating
Outlook to Negative or, in an extreme case, downgrade the ratings. A very
adverse outcome from the antitrust investigations or a decision to significantly
increase leverage to fund shareholder-friendly actions could also result in a
negative rating action. However, Fitch believes there is substantial cushion in
the ratings to withstand adverse developments before a negative rating action
would be considered.

Fitch has taken the following rating actions:

TRW
–Issuer default rating (IDR) upgraded to BBB- from BB+.

TRW Automotive
–IDR upgraded to BBB- from BB+;
–Secured credit facility rating affirmed at BBB-;
–Senior unsecured rating upgraded to BBB- from BB+.

Additional information is available at www.fitchratings.com. The ratings above
were unsolicited and have been provided by Fitch as a service to investors.

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);
–2012 Outlook: US Auto Manufacturers and Suppliers (Dec. 15, 2011).

Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance
2012 Outlook: US Auto Manufacturers and Suppliers

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