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IPO could help ease Allison Transmission's debt

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Allison Transmission Inc.'s enormous debt load is probably one factor driving the company to consider a public offering, an investment analyst said Monday morning.

The Speedway-based company is talking to investment bankers about raising $500 million to $1 billion through a third-quarter IPO, Reuters reported late last week. That amount would help Allison pay down some of its debt and strengthen its balance sheet so it could refinance the rest, said Mark Foster, chief investment officer at Kirr Marbach & Co. in Columbus.

"That's a fairly normal scenario the last six to nine months," he said.

Allison issued $4 billion in bonds related to its 2007 acquisition by two private equity firms. About $1.1 billion of that debt is junk-rated with interest rates about 11 percent and comes due on Nov. 1, 2015.

"That could be part of the story as well," Foster said. "Those are very high interest rates to pay."

Noting Allison's high credit risk, Moody's gives the company an overall rating of B3, which is a speculative grade, with a stable outlook. Moody's analysts also noted in a May 2010 report that Allison has a track record of generating a lot of free cash. The company's revenue in 2009 was roughly $1.8 billion, Moody's said.

Allison makes automatic transmissions for commercial trucks and military vehicles, and it dominates the U.S. market. It was a unit of General Motors until 2007, when it was acquired for $5.6 billion by Onex Corp., based in Toronto, and Carlyle Group, based in Washington, D.C.

Allison employs about 2,700 people. Most of the work force is at the headquarters and production facilities in Speedway.

General Motors got a lot of attention for its $23 billion offering last fall, but a smaller company like Allison might perform better, Foster said. "Our friends down the street at Cummins have done pretty well," he noted.

Columbus-based Cummins, which sells heavy-duty diesel engines all over the world, had its best year on record in 2010 and continues to trade at more than $103 per share.  

Allison executives have declined to comment on the IPO talks.

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