Moodys Downgrades Allison Transmission

Moody’s Investors Service has lowered the corporate family and probability of default ratings on Allison Transmission Inc., a Speedway, Ind.-based maker of automatic transmissions for commercial and military vehicles. The Carlyle Group and Onex Partners bought Allison Transmission from General Motors in 2007, for $5.575 billion.



Moody’s Investors Service lowered the Corporate Family and Probability of Default ratings of Allison Transmission, Inc. (Allison) to B3 from B2. In a related action, the rating of the senior secured bank credit facility was lowered to B2 from B1, the ratings of the senior unsecured notes were lowered to Caa2 from Caa1. The outlook is changed to Negative.

The downgrade of Allison’s Corporate Family Rating to B3 reflects the expected impact of the dramatic decline of global economic conditions and challenges in the global credit markets on the demand for commercial vehicles. The previous Corporate Family Rating anticipated a rebound in the commercial vehicle market in 2009 in advance of 2010 United States diesel emission regulations. However, current industry forecasts are now indicating a decline in North American commercial vehicle production in 2009 with any potential recovery likely deferred until 2010. As such, Moody’s estimates that Allison’s leverage will be higher than anticipated in 2009 and beyond. Further limiting the company ratings over the intermediate term is the prospect of weaker coverage of interest expense, and cash generation at levels which are expected to be indicative of the B3 rating. Allison’s market position is supported by high adoption rates of automatic transmissions, and ongoing aftermarket demand.

The negative outlook anticipates that without a substantial recovery in the company’s end markets further downward ratings pressure could develop. In addition, a prolonged weakness in the company’s operating metrics could adversely impact the company’s liquidity as covenants under the senior secured credit facilities tighten over the next twelve months. The company’s bank group has approved an amendment to permit voluntary purchases of the term loan facility at values below par. Under certain conditions, meaningful usage of this option would be viewed as a distressed restructuring.

As of September, 30 2008 the company had a reasonable amount of cash on hand. Yet, going into 2009, free cash flow generation will be pressured by the weak industry environment for commercial vehicles. Allison’s $400 million revolving credit facility has not been drawn and has nominal amounts of LC usage. The nearest debt maturity is the revolving credit facility which matures in August 2013 and the company faces about $31 million of required amortization under the term loans over the coming twelve months. The principal financial covenant is a total senior secured leverage ratio test which reduces over the life the senior secured credit facility. Covenant cushions will likely reduce over the coming months as industry conditions deteriorate. Alternate forms of liquidity are limited, as the senior secured credit facility is secured by a lien on substantially all assets of the Company.

The following ratings are lowered:

Corporate Family Rating, to B3 from B2

Probability of Default, to B3 from B2

Secured revolving credit, to B2 (LGD-3, 38%) from B1 (LGD-3, 38%);

Senior secured term loan, to B2 (LGD-3, 38%) from B1 (LGD-3, 38%);

Senior unsecured 11% notes due 2015, to Caa2 (LGD-5, 89%) from Caa1 (LGD-5, 89%);

Senior unsecured 11 ¼ % toggle notes due 2015, to Caa2 (LGD-5, 89%) from Caa1 (LGD-5, 89%);

The last rating action on Allison was on October 15, 2007 when the Caa1 rating was assigned to the senior unsecured 11 ¼ % toggle notes, and the B2 Corporate Family Rating was affirmed.

The principal methodology used in rating Allison was the Global Auto Supplier Industry Methodology, which can be found at in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

Allison Transmission, Inc., headquartered in Speedway, IN, designs and manufactures automatic transmissions for commercial and military vehicles. Revenues in 2007 were roughly $2.4 billion.