February 14, 2013 / 5:25 PM / 5 years ago

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.


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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