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.
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
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.
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.