American Axle targets 2x, refis $400 million, to redeem $100 million

By Devika Patel

Knoxville, Tenn., May 22 – American Axle & Manufacturing Holdings Inc. plans to decrease its net leverage ratio to 2x by the end of 2019 but may go lower, as the company is targeting a range of 1.5x to 2x leverage.

The company refinanced $400 million of senior notes in the first quarter, extending the maturity by five years.

It also plans to use cash on hand and proceeds from an asset sale to redeem $100 million of its 6 5/8% senior unsecured notes due 2022 on May 30.

The company has “robust” free cash flow generation and “strong” liquidity and plans further debt paydowns.

“From a capital allocation perspective, we’re focused on our target to reduce our net leverage to around 2x by the end of 2019,” treasurer Shannon Curry said at the Barclays High Yield Bond & Syndicated Loan Conference in Colorado Springs, Colo., on Tuesday.

“The historical nature of our company, we prefer to operate at lower levels of leverage.

“We target 2x because we think that gives us flexibility.

“If we’re targeting 2x and we have a good strategic opportunity, that gives us room to go up for a shorter time for the right strategic acquisition.

“We wouldn’t necessarily stop at 2x.

“If we hit 2x and it’s still the best use of our cash flow, we’d continue to de-lever.

“It’s just the financial flexibility that gives us comfort and causes us to target, to operate somewhere between 1.5x and 2x on a general basis,” Curry said.

The company refinanced $400 million of notes in the first quarter.

“In the quarter, we were able to refinance $400 million of our senior notes successfully and to push out the maturity on these notes for five years,” Curry said.

“We continue to look for ways to enhance our already healthy debt maturity profile,” Curry said.

Sale helps fund redemption

In April, American Axle sold the aftermarket business of its Powertrain business unit to Hidden Harbor Capital Partners for approximately $50 million.

The company will use the proceeds for the redemption of $100 million of its 6 5/8% senior notes due 2022, including accrued and unpaid interest to the redemption date of May 30.

“Earlier this quarter, we announced a sale of the aftermarket business of our Powertrain business unit for approximately $50 million,” Curry said.

“We also announced that we’d redeem an additional $100 million of our 6 5/8% senior notes that are due in 2022.

“That redemption will be completed on May 30.

“We’re using cash on hand for that redemption, including the $50 million we took in from the sale of the aftermarket business and we’ll continue to look for ways to utilize our cash flow as we work towards our goal of reducing leverage over time,” Curry said.

The company may pay down other debt, but it has flexibility since its average debt maturity is six years.

“Our favorable debt maturity schedule gives us optionality for further gross debt paydowns,” Curry said.

“We have a lot of flexibility in this regard.

“The average maturity in our profile is over six years,” she said.

The company expects good free cash flow, which will be used for net debt reduction.

“We’re targeting another robust year of free cash flow at approximately 5% of sales,” Curry said.

“If we look at a multi-year period, we expect to generate over $1.5 billion of adjusted free cash flow in the four-year period that started in 2017.

“We expect this to be the main driver of growth and net debt reduction and value accretion over the next couple of years.

“We expect our EBITDA margin during this timeframe to be in the 17% to 18% range and starting in 2019 we’ll benefit from lower capex spending, lower integration restructuring costs and also lower interest payments,” Curry said.

Liquidity is “strong.”

“Our liquidity was strong at the end of the first quarter,” Curry said.

“It remains strong – over $1.3 billion.

“That’s including our unused and committed revolver and cash on the balance sheet,” Curry said.

American Axle is operating with the fiscal discipline of an investment-grade company, but management does not know if the rating agencies will recognize this.

“As far as the rating agencies go, we can’t control, if at some point we hit certain metrics, they may or may not reward that with an investment-grade rating,” Curry said.

“We like to operate with the fiscal discipline of an investment-grade company.

“The ratings will kind of fall where they may based on the factors that they consider, but it’s really the fiscal responsibility of the balance sheet that we’re targeting, not a specific rating,” Curry said.

American Axle is a Detroit-based manufacturer and designer of driveline and drivetrain systems and related components and modules, chassis systems, electric drive systems and metal-formed products.

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