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Guest, Keen and Nettlefolds

01 October 2019 by jbchevrel

GKN Holdings Limited (GKNLN) is a historical UK engineering group founded in 1759, mainly producing automotive components and aerospace vehicles/components. It is currently split into 4 big divisions (Aerospace Automotive Powder-Metallurgy and Wheels & Structures). The name has historically fluctuated between Main (23 28 29) and XO (25 26 27 30 31 32). It is, at c120bp on the 5y, in the tight third of XO32 single names and in the tight third of the [80,220] post-Melrose-takeover range. It is currently rated BBB- (S&P)/BB+/Ba1, and S&P yesterday affirmed the BBB- ratings with an outlook remaining negative. In its last update, Fitch has downgraded GKNLN in Dec-18 from BBB- to BB+ / stable. GKNLN has notes in GBP only, £430m 19s £450m 22s and £300m 32s, total ~£1.2b to put in regard with an expected ~£1.5b ebitda (per year) and £700m expected free cash flow (in total) over the next two years. S&P has also removed the unsecured GKNLN bonds from CreditWatch, where they had been placed with negative implications in Mar-18. This reflects S&P’s eased subordination concerns and the belief GKNLN will continue to have full access to liquidity support via facilities issued by its owner/guarantor Melrose PLC (MROLN). The negative outlook is still there, as it reflects credit metrics at the weaker end of the BBB- spectrum and an exposure to the commonly seen as vulnerable automotive sector. S&P confirmed the view that GKNLN is (relatively to UK peers) less vulnerable to a no-deal Brexit, although they acknowledge it is not entirely immune and could experience supply chain disruption. S&P also took into account the postponed sale of the Powder-Metallurgy division, which it now expects in 2020 at the earliest. S&P also positively revised its view of Management & Governance from fair to satisfactory, after demonstrated capacity to 1/ meet financial targets 2/ reduce pension deficit 3/ gradually improve credit metrics. S&P action was in line with market expectation, thus no big move WTD. (i) Delayed disposals (Powder-Metallurgy / negative) (ii) Automotive exposure (negative now) (iii) Restructuring in Aerospace (positive) (iv) Brexit (negative) are probably going to remain the 4 key risks to the name, from here. MROLN’s reaction function is also key. They have done relatively small divestments (~£200m total -- sold Germany-based Walterscheid Powertrain Group to the US-based PE fund One Equity Partners + one of its subsidiaries has divested 43.6% stake in space launchers & aircraft components manufacturer Sabca to part of Dassault). Of these ~£200m net proceeds, MROLN had committed to send just ~£20m towards plugging the GKNLN pension scheme deficit, the rest being used to pay down MROLN’s debt, which had increased post GKNLN (controversial if not hostile) acquisition for ~£8b. At the time of the deal (Mar-18), MROLN had committed to the GKNLN (at the time) £1.1b pension deficit, vs which the £20m contribution seems small if not meaningless.