CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Nemak, S.A.B. de C.V.'s (Nemak) Long-term Issuer Default Ratings (IDRs) at 'BB+' and its long-term national scale rating at 'AA-(mex)'. The Rating Outlook has been revised to Positive from Stable. A complete list of rating actions follows at the end of this press release.
The revision of the Outlook to Positive reflects Fitch's view that Nemak's credit metrics should continue to strengthen over the next two to three years, as demand for the company's high value added aluminum engine blocks and structural products should remain sound and result in compound annual consolidated equivalent volume growth of around 3%. Much of the growth is expected to come from the company's products in Europe and Asia. The expansion of Original Equipment Manufacturers (OEM) in Mexico should also bolster demand.
The revision also reflects Fitch's view that adverse U.S. trade policy against Mexico would not be sufficient to reverse the deeply rooted integration of the automotive industry in North America. As a result, Nemak's results are not expected to be changed materially by policy changes of the new administration. The long average life of vehicle platforms and immediate capacity constrains in the U.S. would make production relocation cost prohibitive for OEMs. Further the cost competitiveness of Mexico against all major vehicle producing hubs including the U.S. should be sustainable.
The ratings reflect Nemak's business position as a large Tier-1 supplier of aluminum components, regional and product-portfolio diversification, low cost structure and solid funds from operations. The ratings also reflect the cyclicality of the automotive industry, the company's still large concentration in North America and its exposure to Detroit's three OEMs. Other concerns include the company's acquisitive nature and at times significant capex requirements; although strong cash flow from operations and projected free cash flow (FCF) suggest that the company should be able to comfortably reduce its net debt/EBITDA leverage to below 1.5x by 2018.
KEY RATING DRIVERS
Strong Global Business Position
Nemak's ratings reflect the company's strong position in high-tech aluminium components for the automotive industry in North American, South American and European markets; its presence in high-growth regions, such as Asia and its high percentage of installed capacity in low-cost countries. The ratings also reflect Nemak's long-term customer relationships, its use of aluminium price pass through contracts that reduce raw material volatility, its position as an essential supplier for Detroit's OEMs and its participation in several of the largest global engine platforms.
North America Slowing Down
The company derives about two thirds of its EBITDA from North America, primarily through the sale of components used in the assembly of vehicles sold in the U.S. where total light vehicle sales grew strongly during 2009-2015. Fitch believes U.S. vehicle sales should remain at around 17 million over the intermediate term, slightly below the 17.5 million expected for 2016. Nemak has continued to gain incremental business which should position the company well to continue to grow volumes despite slower industry tailwinds in the U.S. Although uncertainties regarding U.S. trade policy have increased, Fitch believes automotive industry integration between the U.S. and Mexico will be difficult to reverse. Long vehicle production lead-times and OEM cost considerations should prevent major capacity relocations Further, Mexico's cost competitiveness would likely remain despite potential tariff increases.
Favorable Operating Performance
Nemak's financial performance has continued to strengthen in 2016 primarily due to improved mix of higher value added products, a strong U.S. dollar, and lower energy prices. The company is also showing continued solid performance in Europe where volumes have grown 9% on a year-to-date basis as of September 2016 after growing 8% during fiscal year 2015. Nemak generated USD776 million of EBITDA during the latest 12 months (LTM) ended Sept. 30, 2016, which compares favorably with EBITDA of USD699 million in 2014 and USD611 million in 2013. Fitch is projecting that EBITDA will strengthen to around USD800 million in 2016 and will remain solidly above that level in 2017.
Lower Expected Leverage
Free cash flow (FCF) was negative USD22 million during the LTM ended September 2016 and compares to positive USD39 million during full year 2015. Total debt/EBITDA ratio was 1.9x as of the LTM ended third-quarter of 2016, which is slightly above the 1.7x registered at year-end 2015. Fitch estimates neutral FCF in 2016 and possibly 2017 as the company continues to invest in expanding its casting and machining capabilities to serve new programs awarded. Net leverage should be around 1.7x in 2016 and 1.6x in 2017 compared to 1.6x at year-end 2015. Nemak's total debt including capital leases as of third-quarter 2016 was USD1.5 billion.
KEY ASSUMPTIONS
--North America auto production grows low-single digits in 2016 and flattens-out over the intermediate term.
--Equivalent unit volume grows low to mid-single digits over the intermediate term.
--Total debt declines below USD1.4 billion over the intermediate term.
--Capex peaks in 2016, and then falls to more normalised levels in subsequent years.
--Dividends of about USD95 million per year.
--The U.S. dollar exchange rate against the Mexican peso does not weaken significantly below MXN20:USD1.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a positive rating action include:
--Gains in product, customer or geographical diversification coupled with increased volumes that lead to continued strength in EBITDA generation;
--Sustained positive FCF (FCF margin around 3%);
--Sustained levels of total debt/EBITDA around 1.5x;
--Strong liquidity supported by a healthy combination of cash, FCF generation and committed credit facilities relative to upcoming debt obligations.
Future developments that may, individually or collectively, lead to a negative rating action include:
--A severe decline in North American vehicle production that leads to reduced demand for Nemak's products;
--A reduction in EBITDA generation resulting in total debt/EBITDA above 3x for a sustained period of time;
--Sustained negative FCF;
--Sustained weak liquidity relative to upcoming debt obligations;
--Large acquisitions or investments financed mostly with debt resulting in an expectation of higher leverage levels in the mid- to long term.
LIQUIDITY
Nemak's liquidity position is considered sound. As of Sept. 30, 2016, the company's short-term debt was USD198 million. This debt is mostly composed of working capital financing, which favorably compares to USD108 million of non-restricted cash and USD354 million in undrawn committed credit lines maturing in 2018 and 2019. Fitch projects Nemak's cash flow from operations (CFFO) should remain strong at around USD600 million. This strong level of CFFO coupled with low leverage and good access to bank loans and debt capital markets should allow Nemak to continue to rollover debt maturities, including working capital financing, of about USD450 million over the next two years. At the end of 2015 Nemak obtained USD300 million under a syndicated bank loan and used part of the proceeds to repay MXN3.5 billion of its local Certificados Bursatiles with final maturity in 2017.
FULL LIST OF RATING ACTIONS
--Long-term Foreign currency Issuer Default Rating (IDR) at 'BB+';
--Long-term Local currency IDR at 'BB+';
--Long-term national scale rating at 'AA-(mex)';
--USD500 million senior unsecured notes due 2023 at 'BB+'.
Date of Relevant Rating Committee: Nov. 16, 2016
Additional information is available at www.fitchratings.com.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
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