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Morningstar | Adient's Debt Refinancing News Materially Improves Its Financial Health in Our View. See Updated Analyst Note from 15 Apr 2019

We maintain our Adient fair value estimate after the seating supplier announced a balance sheet restructuring. We had been waiting for an asset sale or a balance sheet remake to give the company more time to fix its execution issues first disclosed in early 2018. The major debt maturity concerning us was a $1.2 billion Term Loan A due in July 2021. Adient intends to refinance this debt with $750 million of new senior secured bonds due in 2026 and a $750 million Term Loan B. The company has not disclosed Term Loan B's maturity date. Adient also had an undrawn $1.5 billion credit line expiring in July 2021 that will be replaced, by our math, with a $400 million credit line. An expiration date on the new credit line is unknown, but we expect it to be around 2026 and we expect Adient to only use it in an emergency.

We like this news because total debt only increases by about $300 million while giving Adient five years of additional time to fix itself. We don't think new CEO Doug DelGrosso needs that much time, but a 2021 maturity made us nervous about Adient not being able to correct things before a recession hit. We are now less concerned about bankruptcy risk and will look for more information on the new capital structure when Adient reports fiscal second-quarter results on May 7.

On April 15 Adient preannounced some fiscal second-quarter results. Management expects revenue down about 9% year over year to $4.2 billion due to currency headwinds. It also expects adjusted EBITDA of $185 million-$195 million (consensus was about $182 million) versus $362 million in the prior-year's quarter. More launch problems and resulting premium freight charges are blamed, but we are glad to see management estimating positive free cash flow for the quarter of $45 million-$60 million versus a burn in the prior-year's quarter of $146 million. It reported improved receivable collection, less capital expenditures, and favorable timing differences as reasons for the cash improvement.

We estimate that the new $1.5 billion of debt increases Adient's net secured leverage ratio to about 1.6 times from 1.3 times at Dec. 31 but that is still well below the covenant's required ratio of up to 2.5 times. Adient already has $900 million in unsecured bonds due in 2026, so 2026 maturities are now at least $1.65 billion and could be higher depending on Term Loan B's maturity. We expect future refinancing actions to move some of this debt beyond 2026 and to lower the interest rate on the debt. The existing $900 million 2026 bonds currently yield about 8.4% on a 4.875% coupon, so these new 2026 bonds will probably be expensive debt. We think management will eventually seek a lower rate via a new bond offering once Adient's situation improves.