Fitch Affirms Sifco's IDR at 'B-'; National Scale Rating Downgraded to 'BB(bra)'; Outlook Stable

Tue Sep 17, 2013 5:04pm EDT

(The following statement was released by the rating agency) SAO PAULO, September 17 (Fitch) Fitch Ratings has taken the following rating actions on Sifco S.A. (Sifco): --Local and Foreign Currency Issuer Default Rating (IDR) affirmed at 'B-'; --USD75 million senior unsecured notes due 2016 affirmed at 'B-/RR4'. In conjunction with these rating actions, Fitch has downgraded Sifco's National Scale rating to 'BB(bra)' from 'BB+(bra). The Rating Outlook is Stable. Sifco's credit ratings reflect the company's weak liquidity, high financial leverage, and business risk in the cyclical automotive business. Sifco is one of the main suppliers of front axles for trucks and buses in Latin America, with a market share of 98%. The ratings also incorporate the company's volatile operational margins, limited product and customer diversification, and the important commercial relationship with Dana Corporation. The company's ratings are constrained by industry cyclicality. The downgrade in the National Scale rating reflects Sifco's operational performance which has been below expectations previously incorporated in the ratings. The Stable Outlook incorporates Fitch's expectations that Sifco's operational performance will benefit from the industry's rebound during 2013. The Outlook also reflects the view that it will have the capacity to better balance its cash flow from operations and the execution of its capital expenditure (capex), thus reducing the pressure for incremental debt and/or further weakening of its cash position. The Stable Outlook also reflects Fitch's expectations that Sifco will be able to continue rolling over its short-term debt. RATING DRIVERS: Low Liquidity The company's liquidity position remains weak, as it relies on Sifco's capacity to keep refinancing its short-term debt. The company capacity to refinance this debt, moderate capex levels, and to improve free cash flow (FCF) generation will be key factors during the next 12-month period ended in June 2014. The company ended June 2013 with cash of BRL126 million (BRL154 million as of Dec. 31, 2012), and debt payments due during the next 12 months ended in June 2014 of BRL303 million. In recent years management has consistently been able to roll over its short-term debt while short term proportion of total debt has remained historically stable at around 40% of the company's total debt. During the past few years, the company was not able to complete a major debt refinancing and improve its debt payment schedule. High Leverage The ratings incorporate the company's current high leverage. Sifco's gross leverage, measured by total debt divided by EBITDA, and net leverage ratios, were 8.7x and 7.3x, respectively, for the latest 12 months (LTM) ended June 30, 2013. Total debt has remained relatively stable for the last 18 months ended June 2013, totaling BRL758 million. This debt includes BRL261 million of tax refinancing, one of the company's main source of funds in the recent years. Limited revenue growth and neutral FCF are expected during 2013. The ratings incorporate expectations that the company will see limited revenue growth during 2013, with total 2013 revenues around BRL850 million. EBITDA margin is expected around 8.5% while FCF is expected to be neutral during 2013. Preliminary 2013 results indicate a domestic market rebound, as sales in this market rose around 10% in the first eight months, compared to the same period of 2012. However, 2013 revenues are expected to be flat, driven by Sifco's export market, as its main U.S. customer, Caterpillar, has slowed down its purchase orders and now expects a market recovery toward the second quarter of 2014. The company revenues, EBITDA and EBITDA margins were BRL857 million, BRL76 million, and 8.9% during LTM June 2013. During LTM June 2013, the company's FCF was negative BRL66 million resulting in a negative FCF margin of 8%. FCF calculation for the period considers BRL 11 million in cash flow from operations (CFFO) minus BRL76 million in capital expenditures. FCF is expected to be negative during 2013 in the low single digits, which considers some improvement in the company's 2013 CFFO, driven by a more favorable domestic environment and a more moderate 2013 capex level when compared with the prior year 2012. Key Rating Drivers The ratings are expected to be driven by the development, during the next few quarters, of Sifco's liquidity and gross adjusted leverage resulting from the company's capacity to balance its CFFO with capex levels. Further deterioration on company's liquidity and leverage driven by significant negative FCF levels could lead to a negative rating action. Improvement in the company's liquidity and debt payment schedule as a result of the completion of a major refinancing coupled with consistent operational performance improvement could lead to a positive rating action. Contact: Primary Analyst Ingo Araujo Associate Director +55-11-4504-2205 Fitch Ratings Brasil Ltda. Alameda Santos,700 Cerqueira Cesar - Sao Paulo - SP Secondary Analyst Jose Vertiz Director +1 212-908-0641 Committee Chairman Ricardo Carvalho Senior Director +55-21-4503-2627 Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: elizabeth.fogerty@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Corporate Rating Methodology' dated Aug. 2013. 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