NEW YORK--()--Fitch Ratings has assigned a 'BB' rating to Automotores Gildemeister S.A.'s (AG) proposed bond issuance. The target amount of the proposed issuance will be up to USD300 million; the final amount of the issuance will depend on market conditions, and the tenor is projected to be from seven to 10 years. Proceeds from the proposed issuance will be primarily used to fund increase in inventories, refinance existing debt, capital expenditures, and to improve the company's liquidity position.
Fitch currently rates AG as follows:
--Foreign currency Issuer Default Rating (IDR) 'BB';
--Local currency IDR 'BB';
--USD400 million senior notes due in 2021 'BB'.
The Rating Outlook is Stable.
AG's credit ratings reflect the company's stable market position, solid brand recognition, and high margins. AG's business position in the automobile distribution and retailing industry within Chile and Peru is seen as sustainable in the medium term, with market shares in each of these markets of approximately 12% and 17%, respectively, at the end of 2012. The ratings consider AG's ability to withstand competitive pressures based upon its market position, as the third largest auto distributor in Chile and the second most important importer and distributor in Peru. Also incorporated in the ratings is the company's business model, which combines importation, distribution, and retailing activities and has resulted in EBITDAR margins around 11% during the 2010-2012 period.
The company benefits from the strong brand recognition of the vehicles it sells. Hyundai Motor Company (Hyundai), rated 'BBB+'/Stable Outlook by Fitch, is the most important brand sold and distributed by the company, accounting for approximately 70% of AG's revenues. The company's commercial tie to Hyundai is seen as stable as the commercial relationship between AG and Hyundai has existed for more than 20 years. AG is Hyundai's sole importer in Chile and Peru of passenger cars (PC) and light commercial vehicles (LCV). Based upon AG's success in managing the Hyundai brand, this commercial relationship, which is renewed every four years with the next renewal taking place in 2013, is expected to remain solid through the foreseeable future.
The ratings are constrained by the cyclicality of AG's business, moderate leverage, negative FCF generation during strong sales years due to increasing working capital needs, and limited diversification. The high working capital needs in AG's operations limit the company capacity to increase cash flow from operations (CFFO) during periods of significant expansion as it is occurring during 2010-2012 period. The company's product mix is highly dependent upon Hyundai products, exposing the company to reputation risk and supply risk associated with the Hyundai brand. In addition, the automobile business is AG's core business, generating approximately 90% of its total revenues. The company's geographic diversification is somewhat limited, as Chile represents about 65% of revenues, while Peru accounts for the remainder. The company has recently initiated operations in Brazil, which is seems as positive in the medium term but it is not expected to materially change the company's geographic diversification in the short term. Revenues from operations in Brazil are expected to represent around 6% of the company's total revenues during 2013.
The Stable Outlook reflects Fitch's view that AG will maintain the positive trend in its operating results based upon its market position and brand recognition coupled with the expectation of a continued positive business and macroeconomic environment in its main markets.
Business growth expected to continue in 2013 supported by volume trend. The ratings incorporated the expectation that the favorable macroeconomic-driven sales environment in the company's main markets, Chile and Peru, will continue in the medium term, with rising demand for new cars. Total new cars sold in Chile and Peru during 2012 were around 340 thousand and 168 thousand units, respectively, representing increases of 0% and 32%, respectively, versus 2011 levels. For 2013, total new cars in Chile and Peru are expected to reach growth rates of approximately 8% and 15%, respectively.
AG's total units sold for 2012 in Chile and Peru are expected to close at levels of 47 thousand units and 32 thousand units, representing increases of 17.5% and 23%, respectively, over 2011 levels. For 2013, AG's total units sold in Chile and Peru are forecasted to grow around 15% and 20%, respectively. During LTM September 2012,the company's total revenues was USD1.5 billion, which represents a 40% over 2010's total revenues of USD1.1 billion. Fitch's base case is that AG will reach total revenues of approximately USD1.6 billion and USD2 billion during 2012 and 2013, respectively, while the company's EBITDAR margin is expected to remain stable at around 12%.
Liquidity post issuance is adequate; increasing in adjusted gross leverage driven by business growth is main credit concern. Free cash flow (FCF) is expected to remain negative.
At the end of September 2012, the company had USD44 million of cash and USD80 million of short-term debt. After the completion of the proposed new issuance, AG's short-term debt is expected to remain below USD20 million. Post issuance, other than the short-term financing, the company will not have any material debt payment due during 2013, 2014 and 2015. AG's main debt maturity is composed by the USD400 million senior notes issuance due in 2021.
The business growth also resulted in the company's total adjusted debt increasing by 60% between Dec. 2010 and Sep. 2012. The increase in the company's total adjusted debt was primarily used to finance the company's negative free cash flow (FCF) during 2011-2012 period. AG had USD663 million of total adjusted debt by the end of Sep. 2012. This debt consists of USD531 million of on-balance debt including the senior notes due in 2021 and approximately USD132 million of off-balance lease adjusted debt (calculated as 7x annual rental expenses of approximately USD18 million). AG's total adjusted gross leverage, as measured by total adjusted debt versus total EBITDAR was 3.3x and 3.4x during 2011 and 2010, respectively. This ratio was 4.2x by the end of Sep. 2012, which is weak for the rating category.
AG had a negative FCF of USD167 million during LTM September 2012. Fitch's FCF calculation for the period considers Funds from Operations (FFO) of USD111 million, change in working capital of -USD132 million, capital expenditures of USD99 million, and paid dividends of USD48 million. The ratings incorporate the view that the company's FCF margin ( total FCF over LTM Revenues ratio) will remain negative around 10% during 2012 and 2013, driven primarily by business growth, increasing capex levels, and stable gross working capital cycle (account receivables and inventories) of approximately 155 days.
Key Rating Drivers:
Capital structure during continued business growth is main credit factor.
The increasing trend in the company's gross adjusted leverage driven by the business growth is the main credit concern. The company has supported business growth in recent years with debt, the continuation of a financial strategy that funds business growth only with debt will likely result in a negative action. Conversely, business growth supported with a more balanced combination of equity and debt would be seen as a positive rating factor.
The ratings factored in the expectation that AG will maintain leverage and liquidity at the aforementioned levels. Fitch will view as a positive to credit quality that could trigger a positive rating action a combination of the following factors: improvement in the company's FCF generation resulting in consistent positive FCF levels coupled with solid liquidity and lower gross adjusted leverage.
Factors that could lead to the consideration of a negative rating action include a combination of the following factors:
--Expectations by Fitch of total adjusted gross leverage being consistently at or beyond 4.0x;
--Decline in sales volume due to a deteriorating business and political environment;
--Shareholder friendly actions; and
--Events negatively affecting its reputation with the Hyundai brand.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology