Research: Rating Action: Moody’s Assigns Baa1 to Senior Unsecured USD Notes Offered by Johnson Electric

Hong Kong, 01 Aug 2022 — Moody’s Investors Service has assigned a Baa1 rating to the USD senior unsecured notes to be issued by Johnson Electric Holdings Limited (Baa1 stable).

The rating outlook is stable.

Johnson Electric plans to use the proceeds from the Notes to refinance existing debt and for general corporate purposes.

RATINGS RATIONALE

“Johnson Electric’s Baa1 ratings reflect the company’s position as a global specialist in electromechanical motion systems with a long history, as well as its low customer concentration and geographic diversification. In particular, its global manufacturing footprint helps mitigate operational disruptions caused by the coronavirus outbreak,” said Stephanie Lau, vice president and chief credit officer at Moody’s.

The ratings also reflect the company’s low leverage and excellent liquidity, supported by its prudent financial strategy.

These strengths are offset by the company’s moderate scale and profitability, as well as its strong focus on the motion subsystems product segment.

The proposed notes will lengthen Johnson Electric’s debt maturity profile and have no material impact on its credit metrics, as the company will use the majority of the proceeds to refinance existing debt.

Moody’s expects Johnson Electric’s adjusted debt/EBITDA to grow to around 1.6x-2.0x over the next 12-18 months, from 1.4x in fiscal year 2022 ended March 31, reflecting the pre-funding of its outstanding debt, the majority of which will not mature until July 2024. It also reflects our expectations of modest revenue growth in fiscal 2023 in an uncertain macroeconomic environment. However, we expect its leverage measure to improve towards around 1.1x once the $300 million of outstanding offshore bonds are redeemed by July 2024.

Also, its current net debt will likely revert to net cash as its moderate capital spending will result in positive free cash flow. This level of financial leverage provides adequate protection against temporary shocks.

Despite a slow recovery in global automotive production, Johnson Electric’s revenues will continue to show moderate annual growth over the next two years, supported by its ability to outperform the market and introduce new products.

FACTORS THAT MAY LEAD TO AN IMPROVEMENT OR DEGRADATION OF THE RATING

The stable outlook primarily reflects Moody’s expectation that Johnson Electric will preserve the strength of its balance sheet over the next 1-2 years, despite a temporary weakening in profitability.

Although an upgrade is currently unlikely, Moody’s would consider upgrading the ratings over time if Johnson Electric demonstrates (1) significant growth in scale and greater business diversification through higher contributions high in its industrial segment; (2) an EBITA margin maintained above 14%, which would reflect product leadership; (3) low debt leverage, with a debt/EBITDA ratio below 1.5x; and (4) strong liquidity.

Moody’s could downgrade ratings if (1) Johnson Electric’s sales weaken significantly; (2) its adjusted EBITA margin remains below 8%-9%; (3) its liquidity becomes insufficient; or (4) its debt/EBITDA increases to more than 2.0x on a sustainable basis.

The main methodology used in this rating is Automotive Suppliers published in May 2021 and available on https://ratings.moodys.com/api/rmc-documents/72204. You can also visit the Scoring Methodologies page at https://ratings.moodys.com for a copy of this methodology.

Johnson Electric Holdings Limited was established in 1959 and listed on the Hong Kong Stock Exchange in 1984. It is a global leader in motion systems, which includes motors, solenoids, switches, flexible interconnects, pumps, actuators and powder metal components. The company had revenue of $3.4 billion in fiscal 2022.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Rating symbols and definitions from Moody’s are available at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following information, if applicable to the jurisdiction: Ancillary services, Information to be provided to the rated entity, Information to be provided by the rated entity.

The rating has been communicated to the rated entity or its designated agent(s) and issued without modification as a result of such communication.

This rating is requested. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

Moody’s considers a rated entity or its agent(s) to participate when they have an overall relationship with Moody’s. Unless otherwise specified in the Regulatory Disclosures as a non-participating entity, the rated entity is a participant and the rated entity or its agent(s) generally provide information to Moody’s for the purposes of its rating process. Please refer to https://ratings.moodys.com for regulatory information for each credit rating action, displayed on the issuer/deal page, and for Moody’s policy on designation of nonparticipating rated entities, displayed on https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

The first name below is the primary rating analyst for this credit rating and the last name below is the person primarily responsible for approving this credit rating.

Stephanie Lau
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queens Road
Hongkong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

Chris Park
Associate General Manager
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

Clement Cheuk Yiu Wong
Associate General Manager
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

Release Office:
Moody’s Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queens Road
Hongkong,
China (Hong Kong SAR)
JOURNALISTS: 852 3758 1350
Customer Service: 852 3551 3077

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