Allison Transmission aims for leverage target of 3 times to 3.5 times

By Paul Deckelman

New York, Sept. 23 – Allison Transmission Holdings Inc. has cut its net debt load by $1.66 billion since its 2007 acquisition by several private equity firms from long-time owner General Motors.

Along the way, the Indianapolis-based manufacturer of automatic transmissions for medium- and heavy-duty trucks, tractors, buses and military vehicles has similarly brought its leverage ratio of net debt as a multiple of trailing-12-month adjusted EBITDA down as well.

The company’s executive director for finance, business planning and investor relations, G. Frederick Bohley, told participants at the Invest Indiana Equity Conference on Tuesday in Indianapolis that the company generates “a significant amount of cash. We have premier EBITDA margins north of 30%, and we remain focused on generating that cash.”

From a capital allocations standpoint, he continued, “we’re looking at a near-term target, a mid-term target of 3 to 3.5 times net operating leverage.”

Debt funds buyout

GM had bought the company in 1929 shortly after the death of its founder, James A. Allison. At the time, the company – despite Allison’s original background as an automobile racer – was making aircraft engines and other aviation technology products. During World War II, GM had the company develop power transmissions for tanks and other tracked military vehicles, and after the war, it developed similar systems for use in civilian trucks, buses and even locomotives as well as continuing its military production. Allison became a market leader in medium- and heavy-duty vehicle transmissions. GM sold Allison to private equity companies Carlyle Group LP and Onex Corp. in August 2007 for $5.58 billion.

The acquisition was largely funded with debt. According to presentation materials prepared by the company, pro forma for that transaction, it had $4.2 billion of net debt on its balance sheet issued via its Allison Transmission Inc. subsidiary. The capital structure included a new $3.5 billion credit facility, consisting of a $3.1 billion term loan and a $400 million revolving credit line.

At the end of 2008, net debt had come down to $3.75 billion and the company had a 6.9 times leverage ratio. Net debt continued to come down steadily after that to $2.49 billion by the end of 2013. While leverage spiked to a post-acquisition high of 7.4 times in 2009, it too came down steadily after that and had declined to 4 times by the end of 2013.

Over the last 12 months ended June 30, net debt increased slightly from the 2013 year-end figure to $2.54 billion and leverage continued to ease to 3.8 times.

According to the company’s latest 10-Q filing with the Securities and Exchange Commission in late July, as of the end of the second quarter on June 30, total long-term debt came to $2.67 billion, consisting of $423.5 million of senior secured variable-rate B-2 tranche term loan debt due 2017, $1.78 billion of senior secured variable-rate term B-3 term loan debt due 2019 and $471.3 million of 7 1/8% senior notes due 2019, out of the $500 million that it sold in a quick-to-market offering that priced at par on April 27, 2011.

Some $17.9 million was considered to be current maturities of the long-term debt.

Allison had $453 million of borrowing availability under its $465 million revolver, net of $12 million of outstanding letters of credit.

Cash and cash equivalents totaled $126.7 million at June 30.

Bohley also told the conference participants that with a 12 cents-per-share quarterly dividend, totaling a little less than $90 million annually, “certainly, there’s a significant amount of cash that we’re generating and are committed to returning it to shareholders.”

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