Fitch Upgrades Tenedora Nemak, S.A. de C.V.'s Ratings; Outlook Stable
MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has upgraded Tenedora Nemak, S.A. de C.V.'s (Nemak) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) to 'BB' from 'BB-';
--Local currency IDR to 'BB' from 'BB-';
--Long-term national scale rating to 'A(mex)' from 'A-(mex)';
--USD500 million senior unsecured notes due 2023 to 'BB' from 'BB-';
--MXN3,500 million Local Certificados Bursatiles due 2017 to 'AA-(mex)' from 'A+(mex)'.
The Rating Outlook is Stable.
The ratings upgrade reflects Nemak's strengthened credit profile, its strong business position as a large Tier-1 supplier of aluminum components, increased size, regional and product-portfolio diversification, and reduced concentration of Detroit three original equipment manufacturers (OEMs). In the last five years, Nemak has doubled its revenue and EBITDA, maintained relatively stable debt levels and improved its working capital cycle considerably, and as result its credit metrics have strengthened significantly. In addition, the company has shown an ability to generate cash flow consistently, even with adverse economic conditions.
Fitch expects that Nemak will continue to show positive momentum in revenues and EBITDA as a result of continued recovery in the U.S and an improved outlook for automobile demand in Europe, and estimates that by the end of 2014 Nemak's gross leverage will be at or below 2.4x. Also considered in the ratings is Nemak's geographic diversification of cash flows and its good liquidity position. The ratings are tempered by cyclicality of the automotive industry and by the company's still large concentration in North America as well as to some OEMs.
The rating of the Certificados Bursatiles issuance takes into account the partial guarantee granted by Bancomext equivalent to 29% of the principal amount and 100% of the first interest payment in case of anticipated or scheduled maturity. Fitch believes that a Partial Credit Guarantee (PCG) can reduce loss severity given default and uplifts the guaranteed issuance's rating by some notches above the issuer's stand-alone rating. The overall recovery estimate considering the execution of the guarantee and the proceeds from company liquidation determine the number of notches for the uplift.
KEY RATING DRIVERS
Strong Global Business Position
Nemak's ratings reflect the company's strong position in high-tech aluminum 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-costs countries. The ratings also reflect Nemak's long-term customer relationships, and its position as an essential supplier for Detroit three OEMs and in several of the largest global engine platforms.
Geographical Diversification Will Likely Strengthen Operating Results
The company's expansion in Europe, South America and Asia - through organic growth and the acquisitions made in 2007 - increases its geographical diversification, scale and ties to manufacturers. Fitch believes, these investments will continue to improve Nemak's revenue and cash flow generating ability. In Fitch's view, auto sales in Europe are likely to bottom out in 2014 and to rebound moderately throughout the year. In addition, the company's presence in China and its recently announced plans to expand operations in Russia, provide attractive growth opportunities and diversification. In the U.S., Fitch expects Nemak to benefit from projected low-single digit light vehicle sales growth.
Higher Volumes and Favorable Pricing Trends Support Results
During the past four years, Nemak's volumes, revenues and EBITDA generation have grown consistently as a result of new programs awarded with OEMs in America, Europe and Asia, along with increased market share of American OEMs. Nemak's results have also been driven by higher consumer confidence, in conjunction with a better sales mix, improved productivity and higher fixed costs absorption, as well as by the incorporation of the JL French operations acquired in 2012. Fitch estimates, Nemak's 2013 EBITDA above USD600 million compared to the USD309 million that the company reported in 2008, before the global financial crisis.
Fitch expects year-end 2013 gross leverage including parent company loans to be 2.5x and to strengthen below 2.4x by 2014. In Fitch's opinion, parent loans provided flexibility to service and amortize its debt. These loans are subordinated by contract from the rest of Nemak's senior debt and amortize pro rata with senior creditors. During the past four years, Nemak's leverage metrics have improved significantly as a result of the company's larger scale and increased EBITDA generation. Fitch expects neutral to slightly negative free cash flow (FCF) as a result of higher capex related to the construction of the company's new plant in Russia. Fitch's FCF estimate also considers that dividend payments will not exceed USD70 million in 2014. During the last 12 months to Sept. 30, 2013, Nemak generated USD207 million in FCF and total debt as of the third quarter of 2013 was USD1.4 billion.
Adequate Liquidity and Extended Debt Maturity Profile
As of Sept. 30, 2013, the company's short-term debt was USD247 million and cash balances were USD86 million. The company maintains good access to bank loans and debt capital markets, which in conjunction with cash balances, FCF generation and available committed revolving credit lines of approximately USD190 million maturing in 2015 and 2016, Fitch believes, will be sufficient to face short-term debt maturities. In February 2013, Nemak issued USD500 million of 2023 senior unsecured notes and used the proceeds to refinance existing bank debt with shorter maturity.
Future developments that may, individually or collectively, lead to a negative rating action include, a material decline in volumes that leads to a reduction in EBITDA resulting in higher leverage ratios for a sustained period of time could pressure the ratings. In addition, a material deterioration in FCF could also pressure the ratings.
Positive rating actions seem limited in the medium term given this upgrade. However, significant strengthening in EBITDA generation and consistent positive FCF generation resulting in improvement of leverage levels across the cycle could have positive implications for credit quality.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Ratings Criteria' (Aug. 29, 2013);
--'Criteria for Partial-Credit Guarantees in Emerging Markets' (April 18, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage