United Components Holds Strong Market Position

United Components' new $390 million credit, which backs an $800 million buyout by The Carlyle Group, is supported by the company's diverse product offering and its strong market position, noted Lisa Matalon, v.p. and senior analyst with Moody's Investors Service. Carlyle will invest approximately $260 million of equity to back the buyout with additional financing provided by the new credit facility and a $255 million guaranteed senior subordinated note issue. Moody's has assigned a B1 rating to the credit--a $65 million revolver, a $50 million "A" term loan, and a $275 million "B" tranche--and a B3 rating to the new notes.

United Components is a supplier of a broad range of automotive-related products, including filtration products, fuel and cooling systems, and engine management systems. The company holds the top market position for 66% of overall revenues and holds leading market positions for its remaining product lines and geographical markets, according to Moody's. The geographical diversity and breadth of United Components' product lines effectively creates a barrier to entry for other competitors, explained Matalon.

The ratings assigned to the transaction reflect its high pro forma leverage with the total debt-to-EBITDA clocking in at about 4.5 times. Moody's is also concerned with the company's ability to sustain its current revenue base and margins. United Components' revenues are concentrated largely through its customer, AutoZone. In addition, continued success depends on United Components' ability to eliminate certain commodity-driven product lines, a move which will help to improve margins.

Going forward, United Components looks for improvements in operating margins under the Carlyle management through capital investments, back-office consolidation of the six business segments and the implementation of lean manufacturing techniques. These efforts are aimed at generating near-term cash flow improvement and debt reduction. In addition, Matalon said, "The demographic trends are good for organic growth in demand for aftermarket automotive products." The trends include the growth in the number of vehicles that usually require repairs and a shift in vehicle mix toward the light trucks, which require more premium-placed parts. Officials at Carlyle could not be reached by press time.