S&P Boosts Rating on Delphi (DLPH) to 'BBB'; Sees EBITDA Margins Staying Firm

Standard & Poor's Ratings Services said today that it raised its corporate credit rating on auto supplier Delphi Automotive PLC (NYSE: DLPH)(Delphi; parent of Delphi Corp.) to 'BBB' from 'BBB-'. The outlook is stable. At the same time, we raised the issue-level rating on Delphi Corp.'s senior secured and senior unsecured debt to 'BBB' from 'BBB-'.

"The corporate credit rating on Delphi reflects our view that the company can sustain its profitability in the mid-double-digit EBITDA margin range because of its business focus on products with growth potential and its proven cost discipline," said Standard & Poor's credit analyst Nancy Messer. "Our rating also reflects Delphi's participation in the volatile and competitive global auto supplier industry." In 2013, global light vehicle manufacturers accounted for about 80% of Delphi's sales. Of its total revenue, Europe accounted for 39%, while North America, Asia, and Latin America represented 33%, 22%, and 6%, respectively.

The outlook is stable. We expect that, despite the weak European automotive market and the company's investments for growth, Delphi will continue generating solid earnings and cash flow, with stable credit measures, due to growth in sales and content per vehicle, as well as occasional acquisitions. The credit measures we expect for the rating include debt leverage of 2x or less and FOCF to total debt of 15% or higher through 2015.

Although unexpected at this time, we could raise the rating during the next two years if Delphi maintains its credit measures at current levels or better. For a one-notch upgrade to 'BBB+', we would need to believe that debt leverage would remain well below 2x and FOCF to debt would remain above 25% as global auto production growth declines in 2015 to 2016, and that the company's financial policy would remain conservative. This could occur if Delphi is able to expand revenues, with EBITDA margins in the low-double digits, especially if its technically sophisticated electronic and powertrain products outgrow its lower margin products, and if its business strategy remains consistent with the existing focus on the industry's high-margin, growth segments.

However, the company faces exposure to cyclical and highly competitive end markets, with potential swings in profitability, and we believe that capital allocation will include further return of funds to shareholders through share repurchases and possible debt-funded acquisitions on an opportunistic basis. Over the long term, we believe that Delphi's business risk profile assessment is less likely to improve, given that the auto industry is evolving into a global market and, as a result, competition and cyclicality will remain major considerations.

Although also unlikely, we could lower the rating if we believe that global auto markets will decline, in aggregate, and Delphi will not be able to offset profitability pressures. We could also lower the rating if we believe that Delphi's cash generation would suffer significantly from lower-than-expected vehicle production levels or a spike in unrecovered commodity costs, or if the company makes a transforming acquisition or uses a material amount of cash to fund shareholder-friendly actions.

Our rating incorporates an assumption that during the next two years industry regulations will push higher content for auto emissions control, fuel efficiency, and safety-related products, which Delphi provides. We could lower the rating if this global trend falters and the company's pension- and lease-adjusted FOCF to total debt drops to less than 20%, its pension- and lease-adjusted debt leverage increased to more than 2.5x, or its free cash flow were limited.

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