TEXT-S&P Rates SANLUIS Rassini S.A., Proposed Notes 'B'; Otlk Stable
-- Mexico-based auto supplier SANLUIS Rassini will benefit from strong market shares after having heavily restructured operations in the past years.
-- The company is part of a group that has recently emerged from a debt reorganization procedure.
-- We are assigning our 'B' corporate credit rating to SANLUIS Rassini and our 'B' issue rating to its proposed $250 million senior unsecured notes with a recovery rating of '4'.
-- The stable outlook reflects our expectations that the company's financial metrics will remain strong, but somewhat unpredictable, due to its very aggressive financial policy and volatile market conditions.
On Sept. 24, 2012, Standard & Poor's Ratings Services assigned its 'B' long-term corporate credit rating to SANLUIS Rassini S.A. de C.V. We also assigned our 'B' issue rating to the company's proposed issuance of $250 million senior unsecured notes with a recovery rating of '4', indicating our expectations of average (30% to 50%) recovery in the event of a payment default. The company will use the proceeds to refinance most of its outstanding debt. The outlook is stable.
Our ratings on SANLUIS Rassini reflect its "highly leveraged" financial risk profile due to the company's very aggressive financial policy and the uncertainties about its future financial performance due to volatile global market conditions for auto suppliers. The ratings also reflect our assessment of its "weak" business risk profile, because of the cyclical nature of the automotive industry and SANLUIS Rassini's limited product and client diversity compared with those of its peers. Positive rating factors include the company's strong market shares in components for suspensions and brakes in NAFTA and Brazil-due to quality services, a competitive cost position, and longstanding relationships with its key customers--strong operating margins compared with peers, and its "adequate" liquidity with a comfortable maturity schedule.
We believe SANLUIS Rassini will keep benefiting from its very strong market share in leaf and coil springs (about 90% in North America and 65% in South America), from which it derives the bulk of revenues and cash flows, because of its engineering and technical capabilities and its ability to supply high-quality and cost-competitive products reliably to its main clients. Competition from imported leaf and coil springs has been manageable. We believe it will also maintain its favorable position in brake discs and drums in North America, due to its vertical integration and strong commercial relationships. The company's operations have been heavily restructured since the financial crisis of 2008-2009, including more flexible labor contracts in Mexico and pass-through agreements for steel costs (its main raw material cost). As a result, we believe the company is now well-equipped to manage volume demand fluctuations and sustain adequate profitability. However, significant client concentration constrains the company's business risk profile. About 60% of its revenues come from the three main U.S. auto makers, Ford Motor Co. (BB+/Positive/--), General Motors Co. (BB+/Stable/--) and Chrysler Group LLC (B+/Stable/--); therefore SANLUIS Rassini still relies significantly on market conditions in North America. Although the company benefits from a joint venture in Brazil with Japan's NHK Spring Co. Ltd. (not rated), we assume that cash flows from this operation are not fully shared with the parent company, and cash flow geographic diversification remains limited.
Our base-case scenario assumes that demand in the U.S. will keep improving gradually in the next few years and the company's operations Brazil will also be stronger in 2013 despite the weak performance this year. In 2012, we assume a 3.4% fall in revenues, mainly because of a sales decline in Brazil, and a 9.5% rise in 2013. We also assume that revenues will grow by 3% after 2013 and the brakes division growing at a faster pace due to opportunities in NAFTA, but will remain accounting for about 17% of revenues and 19% of EBITDA. We project SANLUIS Rassini's EBITDA margin will be about 13%, comparing favorably with those of its rated peers.
We view SANLUIS Rassini's financial profile as "highly leveraged." Although credit metrics are expected to be strong for the rating category, we believe the company's financial policies are very aggressive, which will make financial performance somewhat unpredictable in the next few years. The company is part of SANLUIS Corporacion S.A.B. de C.V., which recently emerged from a debt reorganization that resulted in a significant principal haircut to its original debt holders. Despite SANLUIS Rassini's relatively low leverage metric, below 3.0x in 2011, market conditions for auto suppliers will remain volatile and sudden changes in the profitability could quickly weaken credit metrics. Even though the company has made efforts to improve its working capital management and expects to maintain higher cash reserves, swings in operating cash flows can also quickly deteriorate its liquidity, adding pressure to its financial metrics eventually, especially if credit availability tightens in Mexico.
As per our base case, we assume that SANLUIS Rassini's credit metrics will weaken somewhat in 2012 because of the significant slowdown in Brazil and higher debt. This will cause adjusted debt to EBITDA to reach about 3.2x by the end of 2012 and funds from operations (FFO) to adjusted debt to decline to around 13%, compared with 2.7x and 20%, respectively, in the past 12 months ended June 30, 2012. EBITDA interest coverage should improve, as the cost of new debt will be slightly lower, reaching 4.4x by year-end (3.3x in June 2012.) With stronger market conditions in Brazil and profitability improving in Mexican operations, we project adjusted debt to EBITDA to reach around 2.8x and FFO to adjusted debt to rise to about 15.0% in 2013 and be around 2.5x and 18%-19%, respectively, afterwards. Given the long-term nature of the new proposed notes and continuing working capital financing, we do not project that SANLUIS Rassini will pay down debt in the next few years, and credit metrics will improve following stronger cash flows. Nevertheless, the debt's longer tenor will also allow the company to better manage refinancing risks and cash flow swings in the next few years.
SANLUIS Rassini is engaged in the design, manufacture and sale of suspensions parts (leaf springs, coil springs, and suspension bushings) and brake components (brake discs and drums) for light and heavy vehicles in the global automotive industry, with a special focus on original equipment manufacturers.
We consider SANLUIS Rassini's liquidity to be "adequate" under our base-case scenario. We assume the issuance of the proposed senior unsecured notes to refinance most of the company's outstanding debt. Our assessment also contemplates the following expectations and assumptions:
-- Sources of liquidity (cash and equivalents, FFO, and proceeds from the proposed senior unsecured notes) will exceed the uses (contractual debt amortizations, debt prepayments, working capital needs, capital expenditures, and dividend payments) by at least 1.2x over the next 12-18 months;
-- The sources of liquidity will continue to exceed the uses even if our projected EBITDA declined by 15%;
-- Financial covenants under the indenture governing the proposed notes, mainly regarding limitation on incurrence of additional indebtedness;
-- Likely ability to absorb high-impact, low-probability events, with limited need for refinancing because of an improved maturity schedule; and
-- Although the company has managed to finance its working capital needs through bank lines with its banks, as seen in a credit facility for nonrecourse factoring operations and other noncommitted revolving facilities, we believe the company's access to credit markets is limited.
SANLUIS Rassini's proposed senior unsecured notes of $250 million are rated 'B' (the same as the corporate credit rating of the company). The recovery rating of '4' indicates our expectations of an average (30% to 50%) recovery in the event of a payment default.
The stable outlook reflects our expectations that SANLUIS Rassini's credit metrics will remain strong to offset some uncertainties and unpredictability of its financial performance under its very aggressive financial policy and volatile market conditions. It also reflects our expectations that the company will maintain adequate profitability because of its flexible and competitive cost structure, as well as its favorable business position in the NAFTA and the Brazilian markets.
We could upgrade SANLUIS Rassini if it maintains a less aggressive financial policy, sound liquidity, and more conservative financial leverage metrics, while also sustaining its competitive advantages and overall business performance. On the other hand, we may downgrade the company if its liquidity and credit metrics weaken, either because its operating performance deteriorates or due to an aggressive financial or growth strategies, which in turn would make it more vulnerable to market downturns.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Principles of Credit Ratings, Feb. 16, 2011
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011.
-- Key Credit Factors: Business And Financial Risks In The Auto Component Suppliers Industry, Jan. 28, 2009
SANLUIS Rassini S.A. de C.V.
Senior Unsecured B
New Rating; CreditWatch/Outlook Action
SANLUIS Rassini S.A. de C.V.
Corporate Credit Rating B/Stable/--
SANLUIS Rassini S.A. de C.V.
US$0 mil nts B
Recovery Rating 4
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