Fitch Upgrades American Axle's IDR to 'B'; Outlook Stable

The upgrade is supported by improvements in the credit profile which have been achieved and are expected to continue. The favorable changes come from AXL's significant cost cutting efforts and higher production from General Motor's (GM) since plant shutdowns occurred in mid-2009. Changes to the company's capital structure in December 2009 also strengthened the balance sheet and extended debt maturities. AXL has financial support from GM, its largest customer which accounted for 78% of sales in 2009. A modest amount of improvement in sales diversification is expected in the near term as the company has increased its backlog in markets outside the U.S. and new business launches with new customers have begun in 2010 and are scheduled for the next few years.

Credit concerns for AXL are focused on high leverage which is expected to decline considerably over the balance of 2010, negative cash flows in recent years, underfunded pension plans, limited sales diversification, risks to vehicle sales expectations which could be optimistic if the jobless economic recovery restricts vehicle volumes or if a double-dip recession occurs. AXL remains dependent on GM and its sales of light pickup trucks and SUVs. If GM or its end markets for trucks or SUVs deteriorate, AXL is likely to follow. Furthermore, while a number of supplier bankruptcies occurred in 2009 and some plants were closed, excess capacity still exists in the auto industry.

At the end of the first quarter of 2010, AXL had liquidity of $544 million. Cash was $177 million, short-term investments were $3 million and availability on its secured revolver was $264 million; AXL also has access to a $100 million delayed-draw second-lien term loan from GM.

Fitch projects that AXL will generate modest free cash flow in 2010 following the negative free cash flow of $126 million in 2009. In 2010, free cash flow should benefit from lower working capital requirements since AXL receives expedited payments from GM. Since September 2009, GM has been paying terms of net 10 days in exchange for a 1% discount; prior payments were approximately 45 days. Accelerated payments extend through June 30, 2011. AXL can elect to continue to receive expedited payment terms through Dec. 31, 2013. When the expedited payments are terminated, terms will be approximately 50 days which will increase working capital requirements.

Leverage has been high but declining. At the end of the first quarter of 2010, leverage (total debt/EBITDA) was 7.1 times (x) which is significantly lower than 10.7x at the end of 2009. Net leverage (total debt less cash/EBITDA) was 5.8x. AXL has publicly stated that it hopes to achieve a net leverage ratio of 3.0x by the end of 2010 but that it may reach its goal before then. With the outlook for significant growth in EBITDA in 2010 against 2009, Fitch believes that this is an achievable target.

Dividends were suspended in January 2009 and cost cutting efforts were made before and during the global automotive slump. The company estimates that fixed and variable operating costs were cut by over 50%, or $700 million and that it can break even on a U.S. SAAR (seasonally adjusted annual rates) of 10 million light vehicles. These improvements are a result of the 2008 labor negotiations and restructuring actions which reduced manufacturing capacity in the U.S. while increasing capacity in other parts of the world which offered more competitive costs.

At the end of 2009, the pension plan was 58% funded (or $261 million underfunded). The OPEB plan was $507 million underfunded (fully underfunded). In the first quarter of 2010, AXL contributed $25 million to its pension plans. No further contributions are planned for the balance of the year.

The Recovery Ratings (RR) reflect Fitch's expectations under a scenario in which the distressed enterprise value is allocated to various debt classes. The secured Recovery Rating remains 'RR2' which indicates a 71%-90% recovery. The unsecured notes remain 'RR6' which indicates a recovery of 0%-10% in the event of a default.

Applicable criteria are available at '[ www.fitchratings.com ]' and specifically include:

--'Corporate Rating Methodology' (Nov. 24, 2009)

--'Rating Automotive Supply Companies: Sector Credit Factors' (June 8, 2010).

Additional information is available at '[ www.fitchratings.com ]'.

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Fitch Upgrades American Axle's IDR to 'B'; Outlook Stable