NEW YORK, NY–Moody‘s Investors Service downgraded the ratings of Tenneco Inc. (“Tenneco”) – including the Corporate Family and Probability of Default ratings to B1 from Ba3 and B1-PD from Ba3-PD, respectively, the senior secured debt to Ba3 from Ba2, and the senior unsecured debt to B3 from B2. The Speculative Grade Liquidity Rating was downgraded to SGL-3 from SGL-2. The outlook, said Moody’s is stable.
Tenneco, a major brake manufacturer, acquired Federal Mogul last year, and since then the company’s shares have tumbled. In the last year, shares have fallen from $46 to a low of $9.85. Shares closed up on Monday at $10.73.
The lower ratings follow Moody’s revised expectation for a slower pace of deleveraging going forward, along with lower than expected financial performance over the near-term, given a softening global automotive production environment.
Moody’s stated that it believes the strategy remains sound for the separation of the aftermarket and ride control business (“DRiV”) from what will be Tenneco’s clean air and powertrain technologies business, which was the plan following the October 2018 Tenneco/Federal-Mogul LLC merger. Tenneco has deferred the spin-off until mid-2020, for time to strengthen performance to support optimal capital structures at DRiV and for Tenneco, but may be challenged to achieve significantly lower levels of leverage before that spinoff occurs.
Moody’s believes the near term downward trend in global automotive production increases the risk around profit improvement at Tenneco. Recent profit levels were negatively impacted by lower global automotive production and the effect on the parts industry, the consumer shift away from diesel engines, a weaker aftermarket demand, and operating inefficiencies due to changes in the manufacturing footprint. Tenneco’s most recent results also included costs related to attaining previously announced synergies and working capital improvements.
Nonetheless, Tenneco‘s Clean Air and Powertrain business should demonstrate strong long term growth because of increased penetration of clean air technologies.
Moody’s believes the internal combustion engine (ICE) will continue to have strong vehicle penetration, albeit in smaller sizes, especially as emission control regulations drive increasing levels of mild-hybrid and 48-volt hybrid vehicle shares (both containing ICEs) of new automobile sales. Tenneco’s Commercial Truck/Off Highway segment should also benefit from regulatory trends. In addition, the combined aftermarket businesses will also continue to provide a more stable counter cyclical balance to the original equipment business.