Fitch Upgrades Nemak's Ratings to 'BB+'; Outlook Revised to Stable
Fitch Ratings has upgraded Nemak, S.A.B. de C.V.'s (Nemak) Issuer Default Ratings (IDRs) to 'BB+' from 'BB' and its long-term national scale rating to 'AA-(mex)' from 'A(mex)'. The Rating Outlook is revised to Stable from Positive. A complete list of rating actions follows at the end of this press release.
The ratings upgrade reflects further strengthening of Nemak's credit profile as the company has continued to leverage its strong business position and its low cost base to expand its cash flow generation and bolster its credit metrics. The company's focus on developing lightweight aluminium components takes advantage of important growth trends in the global auto industry and should contribute to increased demand for Nemak's products. The gravitation of auto manufacturing toward Mexico should also support positive momentum.
The ratings are tempered by cyclicality of the automotive industry, the company's large concentration in North America as well as its significant exposure to Detroit's three Original Equipment Manufacturers (OEMs). Other concerns include the company's acquisitive nature and at times significant capex requirements; although strong cash flow from operations and projected free cash flow (FCF) suggest that the company should be able to comfortably maintain leverage within management's net leverage target range of 1.5x-2.5x.
The rating of 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. Based on Fitch's estimated recovery from the defaulted issuer (base recovery) and from the Partial Credit Guarantee (PCG) guarantor upon default of the issuer (contractual PCG recovery), the agency has notched the issuance two levels above the issuer's national scale stand-alone rating.
KEY RATING DRIVERS
Strong Global Business Position
Nemak's ratings reflect the company's strong position in high-tech aluminium components for the automotive industry in North American, South American and European markets; its presence in high-growth regions, such as Asia and its high percentage of installed capacity in low-cost countries. The ratings also reflect Nemak's long-term customer relationships, its use of aluminium price pass through contracts that reduce raw material volatility, its position as an essential supplier for Detroit's three OEMs and its participation in several of the largest global engine platforms.
Stable Outlook in North America
The company derives about 62% of its revenues from North America, primarily the U.S. where vehicle sales have been growing strongly since 2009. Fitch believes U.S. vehicle sales growth will ultimately slow, but sales should remain at a relatively strong level for an extended period as the factors that have propelled the U.S. market generally continue. This robust sales level coupled with the company's focus in developing light-weight aluminium components, aimed at reducing weight and increasing fuel efficiency to meet increasingly more stringent emissions regulations, and the increasing gravitation of auto manufacturing to Mexico bode well for continued demand for Nemak's products.
Favorable Operating Performance
Nemak's financial performance has continued to strengthen in 2015 primarily due to improved mix of higher value added products, a strong U.S. dollar, and higher volumes. The company is also showing improved performance in Europe. During the latest 12 months (LTM) ended Sept. 30, 2015, Nemak generated USD746 million of EBITDA, which compares favorably with EBITDA of USD699 million in 2014 and USD611 million in 2013. Fitch is projecting that EBITDA will strengthen to around USD800 million in 2016 and will remain above that level in 2017 as momentum in most factors continues.
FCF generation during 2012-2014 was mostly used to fund the acquisition of J.L. French Automotive Castings, Inc. and to reduce debt by about USD150 million. As of the third-quarter 2015, the company's total debt/EBITDA ratio was 1.7x, which is below the 1.9x and 2.4x registered at year-end 2014 and 2013, respectively. Fitch estimates neutral FCF in 2015, primarily due to higher capex related to expansion of the company's casting and machining capabilities, but is expecting FCF to expand to about USD80 million in 2016 and to grow further in 2017 as capex moderates. Net leverage should be around 1.6x in 2015 and 1.4x in 2016 compared to 1.8x at year-end 2014. Nemak's total debt as of third-quarter 2015 was USD1.3 billion.
--North America auto production grows low-single digits in 2016 and flattens-out over the intermediate term.
--Equivalent volume unit grow low to mid-single digits over the intermediate term.
--EBITDA margins expand significantly in 2015 boosted by unitary cost reductions, lower energy and fuel costs and a strong U.S. dollar relative to the Mexican peso; followed by more moderate margins in 2016-2017 as costs rise moderately.
--The company uses credit facilities to refinance debt maturities. Total debt remains stable over the intermediate term at around USD1.3 billion.
--Capex peaks in 2015, and then falls to more normalised levels in subsequent years.
--Dividends of about USD80 million per year.
--The U.S. dollar exchange rate against the Mexican peso does not weaken significantly below MXN16:USD1
Future developments that may, individually or collectively, lead to a positive rating action include:
--Gains in product, customer or geographical diversification coupled with increased volumes that lead to continued strength in EBITDA generation;
--Sustained positive FCF (FCF margin around 3%);
--Sustained levels of total debt/EBITDA around 1.5x;
--Strong liquidity supported by a healthy combination of cash, FCF generation and committed credit facilities relative to upcoming debt obligations.
Future developments that may, individually or collectively, lead to a negative rating action include:
--A severe decline in North American vehicle production that leads to reduced demand for Nemak's products;
--A reduction in EBITDA generation resulting in total debt/EBITDA above 3x for a sustained period of time;
--Sustained negative FCF;
--Sustained weak liquidity relative to upcoming debt obligations;
--Large acquisitions or investments financed mostly with debt resulting in an expectation of higher leverage levels in the mid to long term.
Nemak's liquidity is considered adequate. As of Sept. 30, 2015, the company's short-term debt was USD404 million mostly composed of working capital financing, which compares to USD101 million of cash and USD192 million in undrawn committed credit lines maturing in 2016 and 2019. Fitch believes that the company's strong cash flow from operations (CFFO) generation, low leverage and good access to bank loans and debt capital markets should allow it to refinance upcoming debt maturities including MXN3.5 billion local note issuance with amortizations maturing during 2015-2017.
FULL LIST OF RATING ACTIONS
Fitch has upgraded Nemak's ratings as follows:
--Foreign currency Issuer Default Rating (IDR) to 'BB+' from 'BB';
--Local currency IDR to 'BB+' from 'BB';
--Long-term national scale rating to 'AA-(mex)' from 'A (mex)';
--USD500 million senior unsecured notes due 2023 to 'BB+' from 'BB';
--MXN3.5 billion Local Certificados Bursatiles due 2017 to 'AA+(mex)' from 'AA-(mex)'.
The Rating Outlook is revised to Stable from Positive.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Criteria for Evaluating Third-Party Partial Credit Guarantees (pub. 10 Nov 2015)
Dodd-Frank Rating Information Disclosure Form
Gilberto Gonzalez, CFA, +1-312-606-2310
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Alberto de los Santos, +52 81-8399-9100
Joe Bormann, CFA, +1-312-368-3349
Alyssa Castelli, +1-212-908-0540 (New York)