TEXT - Fitch rates Tenedora Nemak proposed notes
Feb 14 - Fitch Ratings has assigned the following ratings to Tenedora Nemak, S.A. de C.V. (Nemak): -- Foreign Currency Long-Term Issuer Default Rating (IDR) 'BB-'; -- Local Currency Long-Term IDR 'BB-'; -- Proposed USD300 million senior notes due up to 2023 'BB-(exp)'. Additionally, Fitch currently rates Nemak as follows: -- Long-Term National Scale 'A-(mex)'; -- Certificados Bursatiles NEMAK 07 issuance 'A+(mex)'. The Rating Outlook is Stable. Nemak's ratings reflect the strengthening of the company's operative and financial position after the integration of JL French Automotive Castings, Inc. (JL French) recent acquisition, improved product portfolio diversification by entering into the aluminum transmission components, suspension and structural parts' markets, reduction of the Detroit Three's concentration by strengthening other OEM relationships, continued favorable consistency of revenues and EBITDA, and lower leverage due to higher EBITDA generation. Fitch expects that Nemak will continue to show a positive trend in EBITDA generation that will allow it to generate neutral to positive free cash flow and maintain debt levels relatively stable in the coming years. In Fitch's view, the main challenges the company faces are associated mainly with Capex requirements related to continuing to update installed capacity and addressing new growth opportunities, as well as continue strengthening of its credit profile through lower leverage levels. The rating assigned to 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 the notches for the uplift. 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. The company also has presence in high-growth regions, such as Asia; it has limited exposure to unstable European economies as most of its operations in the region are located in Northern Europe and a high percentage of installed capacity is in low-costs countries. The ratings also reflect the long-term relationship that Nemak has with its customers; the company is considered an essential supplier for Detroit Three OEMs. Also considered in the ratings are the geographic diversification of cash flows and good liquidity position. The ratings are tempered by cyclicality of the automotive industry, and North American operations and customers' concentration. Geographical Diversification of Cash Flows Strengthens Nemak's Business Profile. The company's expansion in Europe, South America and Asia through the acquisitions made in 2007 allowed it to grow its geographical diversification, which was a positive during the fiscal crisis in North America. This expansion strategy also reduced customer concentration, especially with the Detroit Three OEMs, which currently represent 48% of the company's total volume compared to 80% before the acquisitions. Nemak is considered an essential provider for these OEMs. The company has presence in China and India, markets that provide attractive growth opportunities and diversification, as in the coming years these countries are expected to have important developments. Currently, the European market's tough economic situation has resulted in pressures on car sales volume in the region; however, most of Nemak's operations are dedicated to serve both local and export markets, mainly North America and Asia, which has translated to stable production volumes. Higher Volumes and Favorable Pricing Trends Support Results During the past three years, the company has been reporting a continued favorable consistency in sales volume, revenues and EBITDA generation as a result of new programs with OEMs in America, Europe and Asia, along with additional demand due to increased market share with American OEMs. Nemak's results are also supported by higher consumer confidence, in conjunction with better sales mix, improved productivity and higher fixed costs absorption in a greater volume, as well as the incorporation of the recently acquired JL French operations. For 2012 on a pro-forma forma basis (considering 12 months of JL French operations), Nemak's revenues and EBITDA were close to USD4 billion and USD530 million, respectively, compared to USD2.9 billion and USD300 million reached during 2007, before the global crisis. Nemak reported a pro-forma EBITDA per equivalent cylinder head of USD12 dollars for the full year 2012 compared to USD10.5 dollars per cylinderhead in 2011 and US11 in 2010, mainly reflecting a better sales mix of higher value added products. Improved Leverage Nemak has been reducing its leverage in the past three years, mainly, through higher EBITDA generation. At the end of 2012 on a pro-forma basis, the company's gross leverage was 2.7x, and 3.1x considering loans from the parent company. These loans are subordinated by contract from the rest of Nemak's senior debt. In Fitch's opinion, these subordinated credits provide flexibility to its service and amortization, given the parent company's current position. Fitch estimates that Nemak's gross debt to EBITDA will remain below 2.8x in the next two years. At the end of December 2012, Nemak reported a manageable debt structure. The company had cash balances of USD51 million, generated USD73 million of free cash flow (LTM) and had annual average debt maturities of approximately USD150 million for the next two years. The company's liquidity is further supported by available committed revolving credit lines of approximately USD160 million which mature in 2014. Fitch believes that Nemak has enough flexibility to meet its financial commitments. The proceeds of the proposed senior notes issuance will be used mainly to refinance existing bank debt. SENSITIVITY/RATINGS DRIVERS: Nemak's ratings could be affected by a decrease in sales volume and/or an increase in costs and expenses that would negatively impact EBITDA generation, as well as financial and operative ratios. Factors that may be considered positive for the credit profile of the company include a continuing favorable trend in EBITDA generation and constant positive free cash flow generation, allowing it to maintain constant gross leverage levels near 2.5x.
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