U.S. Automotive Component Manufacturers Are Delving into Junk Bond Financing Markets
In a move to bolster their financial positions, three auto parts manufacturers - Adient, BorgWarner, and Lear Corporation - have collectively increased debt issuance in the automotive sector by 6% this year. This comes as German manufacturer ZF Friedrichshafen AG doubles its junk-debt sale to $1.5 billion.
The increased debt issuance and junk-debt sales are not without their challenges, however. With the economy slowing and consumers limiting discretionary spending, companies with weaker credit ratings like ZF and others are under pressure, according to Barings' Best.
Todd Duvick, a senior analyst at CreditSights, believes that suppliers of auto parts can pass through cost increases to customers due to tariffs. This could potentially lead to added costs for consumers in the car sector, as rising global tariffs may weigh on overseas car and auto-part manufacturers.
Despite these concerns, some investors are drawn to this week's deals. The deals are particularly attractive because they cater to specific needs such as M&A and come equipped with higher credit ratings. For instance, auto-technology company Forvia raised $500 million on Tuesday, with its eight-year notes yielding 6.75%. Meanwhile, ZF's $1.5 billion bond due in five and a half years offers a yield of 7.5%.
Barings' Best also noted that some of the deals are coming at comparatively attractive pricing to non-auto sectors. Mike Best, a portfolio manager for senior-secured loans at Barings, echoed this sentiment, stating that some of the deals are coming at comparatively attractive pricing.
However, on the lower end of the high-yield market, the auto sector is still looked at quite skeptically, according to Barings' Best. The junk-rated auto companies that are selling bonds now are generally rated at the upper end of the high-yield spectrum, with ratings in the BB tier.
US President Donald Trump's ramping up of import levies could potentially exacerbate these challenges. The potential impact of these levies on overseas car and auto-part manufacturers remains to be seen, but so far, the "worst fears" about tariffs were not yet realized, according to Barings' Best.
One such example is the auto-parts maker American Axle & Manufacturing Inc., which is raising approximately $2.3 billion in bonds and loans to support its purchase of U.K. peer Dowlais. The specific yield on ZF's $1.5 billion bond due in five and a half years was not specified in the current paragraph, nor was the yield on Forvia's eight-year notes, which can't be bought back for three years.
In conclusion, while auto parts manufacturers are boosting their debt issuance to navigate the challenges posed by tariffs and a slowing economy, investors are still cautious about the sector's prospects on the lower end of the high-yield market. The potential impact of increasing tariffs and the economic slowdown on the auto industry remains a concern, but some deals are still attracting investors due to their specific needs and higher credit ratings.
Read also:
- chaos unveiled on Clowning Street: week 63's antics from 'Two-Tier Keir' and his chaotic Labour Circus
- Skechers Debuts First American Stores Focused on Athletic Footwear Performance
- Budget discrepancy jeopardizes highway projects' financial support
- Racing ahead in Renewable Energy Dominance: Changzhou, Jiangsu Pushes for Worldwide Renewable Energy Ascendancy
