Allison repaid 2015 debt, not worried about 2014 loan; cites cash flow

By Paul Deckelman

New York, June 5 - Allison Transmission Holdings, Inc. paid off the last of its outstanding 2015 notes last month, its chief financial officer said Tuesday and is not worried about meeting a considerably larger credit facility maturity due in 2014.

David S. Graziosi told participants at the 7th Annual J.P. Morgan Diversified Industrials Conference in New York that his company - an Indianapolis-based manufacturer of automatic transmissions for trucks, buses and other medium and heavy duty commercial and military vehicles - has about $1.8 billion of senior secured term loan B-1 debt coming due in August 2014.

But he said that the company was generating sufficient cash flow, with an eye toward debt reduction, "so certainly as we sit, we're not concerned about that particular maturity tower, frankly, given our cash flow profile."

Bank debt funds buyout

The company originally entered into the $3.1 billion of term loan debt as part of $3.5 billion of bank debt financing in the summer of 2007 that accompanied the leveraged buyout of Allison - up till then a long-time component of the former General Motors Corp. industrial empire - by Carlyle Group and Onex Corp.

As of the end of the 2011 fiscal year on Dec. 31, 2011, just under $2.6 billion of the term loan remained outstanding, the rest having been paid down in the interim. In February, the company indicated that it hoped to extend between $1 billion and $1.5 billion of the loan by several years, although in March, Allison and its lenders agreed on extending some $800 million of that debt by three years to August 2017. The extended portion of the loan was priced at 350 basis points over Libor, versus a 250 bps spread on the unextended portion, which totals just under $1.8 billion

Besides the unextended term loan-B-1 and the extended portion, now known as term loan B-2, Allison's capital structure includes a $400 million revolving credit facility. Graziosi said that as of the end of the first quarter on March 31, the facility was undrawn, other than around $30 million allocated for letters of credit.

According to the company's most recent 10-Q filing with the Securities and Exchange Commission covering the first quarter, at the end of the quarter, it had long-term debt of some $3.17 billion, plus another $8 million current portion, against cash and cash equivalents of $192.9 million. Graziosi said that it had a leverage ratio of net debt versus trailing twelve-month earnings of about 3.89 times.

Junk bond activity

The capital structure also includes the $471.3 million of 7 1/8% senior notes due 2019 that remains outstanding out of the original $500 million that the company priced at par in a quick-to-market deal on April 27, 2011.

Allison also started this year off with the $309.8 million of 11% senior cash-pay notes due 2015 that remained outstanding from the original $550 million of those notes that the company sold in October 2007 as part of $1.1 billion in bond financing in support of the company's buyout by Carlyle and Onex. It eliminated $200 million of those notes by redeeming them in February, according to a regulatory filing. Graziosi said that the final $109.8 million of those 11% notes had been paid off on May 1, "so those are out of the way. So if you look at the overall cost of cap[ital], with the [order] book that we have, it's pretty competitive. So we're feeling very good about that."

The other $550 million of those 2007 bonds, a tranche of 11¼% PIK toggle notes, was taken out last year using the proceeds of the 2019 bond deal.

Cash flow up, net debt down

Allison has steadily reduced its debt load since its $5.575 billion acquisition from GM by Carlyle and Onex in 2007. According to data provided to investors by the company, net debt stood at $4.20 billion upon its acquisition. That had been reduced to $3.75 billion by the end of 2008, producing a 6.9 times leverage ratio. Net debt and the leverage ratio continued to fall more or less steadily after that, to $3.07 billion of net debt and a 4.3 times leverage ratio at the end of 2011, and to $2.98 billion net debt and 3.9 times leverage at March 31.

Free cash flow - which the company defines as cash flow from operations less capital expenditures - has meantime increased. It was $193 million in 2008, fell to just $81 million in the challenging 2009 year, but recovered to $315 million in 2010, $372 million in 2011 and $378 million on a last-twelve-month basis as of March 31.

During the question-and-answer period that followed formal presentations by Graziosi and by Allison's chairman, chief executive officer and president, Lawrence E. Dewey, a participant acknowledged the company's cash-flow prowess and balance-sheet progress, but wanted to know what Allison would do should economic conditions worsen and orders fall off.

Dewey said that Allison's actions and performance during "the significant downturn of 2009" would be the likely template for any future such period of trouble.

"I think we can point to the performance in that period, and I would like to think that's something you could expect," the CEO said. "It would certainly be different than today, but still I'm positive that while it may be a little different degree, I think directionally, the priorities would remain the same - we wouldn't have to hock the family jewels to survive. We're pretty solid in that respect."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.