Fitch Affirms Metalsa at 'BBB-'; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has affirmed Metalsa, S.A. de C.V. (Metalsa)'s local and foreign currency Issuer Default Ratings (IDRs) and its senior unsecured 2023 notes at 'BBB-'. The Rating Outlook is Stable.

Metalsa's ratings reflect its strong business position in the Body on Frame (BOF) light vehicles and structural parts for commercial vehicles (CV) segments, increased geographic diversification of operations, long-term relationships with customers and management's commitment to maintaining a solid financial profile. The company's ratings are limited by industry cyclicality, customer concentration with three main clients, revenue concentration in North America and lower expected free cash flow generation as a result of its new product mix.

The Stable Outlook considers that the company will continue benefiting from positive momentum in the North American market, while maintaining a conservative and robust financial profile.

KEY RATING DRIVERS

Strong Business Position and Customer Relationships

Metalsa's ratings reflect its important position in North and South American markets as well as its strong customer relationships. The company is the second largest supplier of light vehicle BOF chassis in North America, with a market share of approximately 41% and the largest in South America with an approximate market share of 50%. Metalsa is also one of the main suppliers of CV side rails in both North America and Brazil, with market positions of approximately 45% and 38%, respectively. As the sole supplier of chassis frames for the next generation of Ford F-150 and GM Chevrolet Colorado trucks, Metalsa expects to become the largest supplier of light vehicle BOF chassis in North America.

Increasing Geographic, Product and Customer Diversification

Metalsa's commercial initiatives coupled with recent acquisitions continue to increase the company's geographic and customer diversification. Fitch estimates that the company will generate about 51% of revenues from its three main customers in 2014 compared to 62% in 2012. In May 2013, Metalsa completed the acquisition of ISE Automotive Group GmbH (ISE), ISE a supplier of body, chassis and safety structures, R.O.P.S. and hinges & transmission components. This acquisition brings revenue diversification as the company integrates new platforms from brands like Audi, BMW and Mercedes Benz. It also expands Metalsa's product-portfolio of body structure modules and safety systems and adds new capabilities such as hot forming technologies. The new operations enhance the company's presence primarily in Europe. In 2013, Metalsa generated 11% of revenues from its European operations, and Fitch projects that the region's contribution to sales in 2014 could be in the 16-19% range.

Integrating ISE's Acquisition

In Fitch's view, Metalsa could benefit from an improved outlook for automobile demand in Europe considering the new capabilities, products and platforms that the new operations bring. However, the agency recognizes that integration risks exist. In 2013, the company reported higher costs and expenses related to its new plants as well as to pre-operating stages of new projects. In Fitch's view, higher costs or delays related to the integration could pressure operating income and leverage.

Metalsa's ratings incorporate a total adjusted debt to EBITDAR ratio below 1.8 times (x). Expectations of sustained increases in leverage beyond this value could pressure Metalsa's credit quality. Fitch estimates that year end 2014 leverage could be higher considering what will likely be another year of high capital expenditures but expects leverage to decrease in the next 18 months. As of Dec. 31, 2013 Metalsa's total adjusted debt to EBITDAR ratio was 1.9x.

Commitment to Maintaining a Solid Financial Profile

Metalsa's ratings continue to incorporate the company's strong commitment to support a robust financial profile. In June 2013, Metalsa announced a USD54 million capital contribution from its parent company, Grupo Proeza, to partially fund the acquisition of ISE. Fitch views Metalsa's liquidity as adequate considering moderately negative free cash flow generation in 2014, available cash and committed facilities. In its base case, Fitch estimates that Metalsa will resume positive free cash flow at a rate of 1-2% of annual sales in 2015. A 2% free cash flow margin across the cycle would be considered typical for the rating category. As of Dec. 31, 2013, the company had USD255 million available under committed credit lines and a cash balance of USD65.4 million compared to short-term debt (including current portion of capital leases) of USD56.1 million.

RATING SENSITIVITIES

Negative rating actions could result from a combination of increased leverage and/or lower EBITDA generation that pressures the company's credit profile. Expectations of sustained leverage beyond 1.8x (as measured by total adjusted debt to EBITDAR) or of lower cash flow generation could pressure Metalsa's credit quality.

Fitch does not expect positive rating actions in the medium term. However, strong free cash flow generation, an established business position as a global Tier-1 supplier, and continued diversification away from its three main customers of operations, in conjunction with low leverage levels could result in positive rating actions.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826633

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Contacts

Fitch Ratings
Principal Analyst:
Gilberto Gonzalez, CFA, +52 (81) 8399-9100
Associate Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, Mexico
or
Committee Chairperson:
Alberto De Los Santos, +52 (81) 8399-9100
Associate Director
or
Alberto Moreno, +52 (81) 8399-9100
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Principal Analyst:
Gilberto Gonzalez, CFA, +52 (81) 8399-9100
Associate Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, Mexico
or
Committee Chairperson:
Alberto De Los Santos, +52 (81) 8399-9100
Associate Director
or
Alberto Moreno, +52 (81) 8399-9100
Senior Director
or
Media Relations:
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com