Fitch upgrades Garrett Motion to ’BB’ on improved financial profile

Investing.com -- Fitch Ratings has upgraded Garrett Motion Inc.’s Long-Term Issuer Default Rating (IDR) to ’BB’ from ’BB-’ with a Stable outlook, the agency announced Friday.

The rating agency also upgraded the company’s senior unsecured notes to ’BB’ from ’BB-’ and affirmed its senior secured notes at ’BB+’.

The upgrade reflects Garrett’s significantly improved financial profile since its spin-off, particularly its superior profitability and robust free cash flow despite ongoing challenges in the global auto sector. Fitch expects EBITDA leverage to remain at or below 2.5x over 2025-2028.

As a niche auto supplier focused on turbochargers, Garrett faces greater electrification transition risk than higher-rated peers. However, Fitch anticipates a slower powertrain transition will sustain turbo penetration, which is essential for reducing CO2 emissions in internal combustion engines.

The rating agency forecasts Garrett’s EBITDA margin and EBIT margin at approximately 17% and 14% respectively over 2025-2028, supported by its lean cost base with 80% flexible costs. This profitability level is strong compared to other Fitch-rated EMEA-based auto suppliers.

Garrett plans to distribute 75% of adjusted free cash flow to shareholders through dividends or buybacks. Fitch assumes about $250 million in annual distributions, with 20% as dividends and 80% as share repurchases. The agency considers this shareholder remuneration policy neutral to the rating.

The company’s exposure to non-auto industrial applications and aftermarket services, which account for about 30% of revenue, is viewed as credit positive. These non-auto projects have better EBITDA margins and longer contract life, helping mitigate the cyclicality of global light vehicle production.

While the electrification transition has been delayed based on recent battery electric vehicle adoption rates, Fitch believes battery electric vehicles will regain appeal as next-generation technologies advance. Garrett’s revenue target of $1 billion by 2030 from zero emissions vehicle products remains unchanged despite new market conditions.

Compared to peers, Garrett is smaller than auto suppliers in the ’BB’ rating category such as FORVIA S.E. and Schaeffler AG, and has a less diversified product portfolio than BorgWarner Inc. However, it maintains some of the strongest EBITDA and free cash flow metrics in Fitch’s auto supplier portfolio.

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