NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings of Automotores Gildemeister S.A.'s (AG) as follows:
--Foreign currency Issuer Default Rating (IDR) to 'B' from 'BB-';
--Local currency IDR to 'B' from 'BB-';
--USD400 million unsecured senior notes due in 2021 to 'B'/RR4 from 'BB-';
--USD300 million unsecured senior notes due in 2023 to 'B'/RR4 from 'BB-'.
The Rating Outlook has been revised to Negative from Stable.
The rating downgrades reflect continued deterioration in AG's credit profile driven by poor operational results.
The Negative Outlook incorporates concerns regarding the company's ability to reverse the negative trend in its operational performance as the factors behind it - FX volatility, limited availability of best-selling models, challenging scenario to reduce inventories in Brazilian operations - are expected to remain during the next quarters. The Negative Outlook also incorporates concerns regarding a potential scenario of continued negative trends in the company's free cash flow (FCF) generation that could result in a deterioration of its liquidity during 2014. The 'B/RR4' rating of the company's unsecured public debt reflects average recovery prospects in the event of a default.
AG's credit ratings continue to reflect its market position, solid brand recognition, and the company's manageable debt payment schedule. The ratings are constrained by AG's business cyclicality, high leverage, negative FCF, and limited product diversification. The ratings also consider AG's high working capital needs.
KEY RATING DRIVERS:
Declining Margins, Negative FCF:
AG's EBITDA margin has seen significant deterioration over the last quarters driven by a decrease in the average price point due to increased sales of entry-level models, the impact of local currencies devaluations on revenues, limited availability of best-selling models that reduces business margins, and losses related to its operations in Brazil. Company EBITDA margins were 9.8%, 7.2%, and 4.7% in 3Q'2012, 2Q'2013, 3Q'2013, respectively. During LTM September 2013, AG's FCF was negative USD226 million. The company's negative FCF during the period reflects lower margins and increasing inventory levels resulting in negative cash flow from operations (CFFO) of USD127 million, capital expenditures of USD62 million, and dividend payments of USD37 million. The company is planning to execute a business plan during 2014 to reverse its negative FCF trend which includes important adjustments in its cost structure, and limiting its capital expenditures to up to 50% of 2013 levels with no dividend payments.
High Adjusted Gross Leverage:
AG's cash generation, as measured by EBITDAR, reached USD123 million in LTM September 2013, a decline from USD160 million in 2012. The company had approximately USD937 million in total adjusted debt at the end of September 2013. This debt consists primarily of USD798 million of on-balance-sheet debt - including the unsecured notes due in 2021 (USD400 million) and 2023 (USD300 million) - and an estimated USD139 million of off-balance-sheet debt associated with lease obligations resulting from USD19.8 million in rentals payments during LTM September 2013.
The company's gross and net leverage, as measured by total adjusted debt/EBITDAR and total adjusted net debt/EBITDAR, reached levels of 7.6x and 6.9x, respectively, during LTM September 2013. This represents a sharp increase versus 4.6x and 4.3x during 2012. The ratings incorporate the expectation of continued deterioration during the 4Q'2013 resulting in the company's adjusted gross leverage being above 8x.
Flexible Debt Payment Schedule:
At the end of September 2013, the company had USD96 million of cash and USD93 million of short-term debt. Positively considered is the company's flexible debt payment schedule; other than the short-term financing, the company has no material debt payment due during the next few years. AG's main debt maturity is composed of the USD700 million senior unsecured notes issuance due in 2021 (USD400 million) and 2023 (USD300 million).
Market Position & Brand Recognition Incorporated:
Hyundai is the most important brand AG sells and distributes, accounting for approximately 70% of its revenues. The commercial ties between the company and Hyundai Motor Company (rated 'BBB+', Stable Outlook by Fitch) remain stable. This commercial relationship has existed for more than 20 years, and it is renewed periodically. 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 9% and 14.2%, respectively, by the end of September 2013. The company's product mix is highly dependent on Hyundai products, exposing the company to reputation risk and shortage supply risk associated with the Hyundai brand, which represents approximately 70% of the company's total revenues.
The ratings are expected to be driven by the development in the company's liquidity, FCF generation, and gross adjusted leverage during the next 12-month period ended in September 2014.
A downgrade could be triggered by a continued deterioration of the company's credit protection measures and cash position due to weak operational results and/or more aggressive capex levels to those levels incorporated in the ratings.
Conversely, improvement in the company's FCF generation, or a reverse of the growing trend in the company's gross adjusted leverage while maintaining low short-term debt relative to the cash position could trigger a revision of the Rating Outlook to Stable.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage