Fitch Upgrades Automotores Gildemeister S.A. to 'CCC' from 'RD'; New Notes Rated 'CCC-/RR4'
Fitch Ratings has upgraded Automotores Gildemeister S.A.'s (AG) long-term foreign and local currency Issuer Default Ratings (IDRs) to 'CCC' from 'RD' (Restricted Default) on completion of the company's debt restructuring. Fitch has also withdrawn the 'C/RR4' ratings on AG's unsecured notes, which includes the US$400 million unsecured senior notes due in 2021 and the US$300 million unsecured senior notes due in 2023. At the same time, considering the terms and conditions of AG's recently executed debt exchange offer, Fitch has assigned a 'CCC-/RR4' rating to AG's US$422 million new senior secured notes due in 2021.
The upgrade of the AG's IDRs to 'CCC' reflects Fitch's assessment of the company's credit profile following the completion of its external debt restructuring. Specifically, the upgrade reflects the improvement in AG's financial flexibility post debt exchange completion. AG's IDRs incorporate the company's capital structure, liquidity, and cash flow generation resulting from the recently executed debt restructuring. AG's US$422 million senior secured notes rating of 'CCC-/RR4' reflects the weaker position in the capital structure of this security relative to the company's secured bank loans. The ratings also consider the challenging business environment the company currently faces in its main markets - Chile and Peru - with declining trend in unit sales in both markets.
KEY RATING DRIVERS
New Capital Structure Incorporated:
On Feb. 24, 2016, AG announced the settlement of the exchange offer with holders of the US$400 million unsecured senior notes due in 2021 and the US$300 million due in 2023. Under the agreement, approximately US$660 million of the original notes - plus approximately US$37 million of accrued interest -were exchanged into new senior secured notes for a total amount of approximately US$422 million, with interest payable in kind at a 10% rate during the first 24 months; and interest payable in cash at a 7.5% rate thereafter. The new senior secured notes mature in May 2021 with no scheduled amortization. The new notes are secured by first-priority liens on real estate properties with an estimated value of approximately US$180 million. The transaction also considers the conversion of approximately US$273 million of debt into equity, and the continuity of current owners and management control. On Feb. 24, 2016, the exchange offer closed with a total of 94.22% of holders validly tendering their existing bonds. Also, on Feb. 20, 2016, Hyundai Motor Company renewed its key distribution agreement with AG for a two-year term.
Material Debt Reduction and Interest Capitalization Add Financial Flexibility:
The company's pro forma total on-balance debt - post restructuring - is estimated to be around US$614 million, which represent a reduction of approximately 30% when compared to AG's total on-balance debt as of Sept. 30, 2015 (US$883 million). The company's ability to capitalize interest expenses during the first 24 months adds financial flexibility. AG's interest expenses during the last 12 months ending Sept. 30, 2015, were approximately USD70 million. Considering the company executes the option of no cash interest payments during the first two years on the new notes, AG's annual cash paid interest expenses are estimated around US$5 million during 2016-2017. After the first 24 months, AG's annual interest expenses are expected to increase to around US$45 million.
Vehicle Sales to Remain Weak in 2016:
Fitch expects vehicle sales to decline in Chile and Peru during 2016 due to the slower economic trends in both countries. Evidence of the weak backdrop includes downward revisions of GDP expectations in recent quarters, declining consumer confidence, and material depreciation of both currencies against the U.S. dollar. This weakness has resulted in lower vehicle sales in both markets during 2015. Chile's 2015 total unit sales are estimated at around 282,232 units, representing a 16% declined when compared to 2014's total unit sales. Peru's 2015 total unit sales are expected at around 156,000 units, indicating a 7% decline versus 2014's total unit sales. Fitch anticipates this trend will continue in Chile and Peru throughout 2016, with total annual average vehicle sales of around 254,000 in Chile and 148,000 in Peru in 2016.
Potential Recovery for 2017-2018 Key:
Although the new capital structure provides financial flexibility to AG, Fitch believes the company's capacity to improve its ability to service its debt - after the first 24 months post-debt restructuring - depends heavily on expansion in vehicle sales in the Chilean and Peruvian markets. Assuming a recovery in these markets in 2017-2018 resulting in annual growth rates in vehicle sales of around 10% in these markets, AG could improve its cash flow generation and reach interest coverage above 1x toward 2018, the first year when the company will have to cover the full annual amount of interest expenses. Absent a recovery in AG's vehicle sales, the company's capacity to cover interest expenses in 2018 will be limited.
Fitch's key assumptions within the rating case for AG include:
--AG executes the option of no cash interest payments during the first two years on the new notes;
--Revenue growth reaches single-digit contraction in 2016 and starts to improve toward 2017-2018, reflecting better macro and business conditions in AG's two key markets, Chile and Peru;.
--2016 EBITDA of around US$25 million;
--2016 total on-balance-sheet debt around US$585 million as of Dec. 31, 2016;
--EBITDA margin reaches around 2.5% in 2015-2016, with some improvements as we near 2017-2018.
-- Annual capital expenditures around USD4 million and no dividend payments during 2016-2021.
Considerations that could lead to a negative rating action include:
--Weak operational results with vehicle sales declining, limiting the recovery of AG's cash flow generation approaching 2018;
--Expectations of AG's interest coverage ratio, measured as total EBITDA to Interest Expenses ratio, substantially below 1x approaching 2018;
--Consistent negative free cash flow (FCF) generation.
Positive rating actions are possible from the combination of the following:
--AG's operational results consistently above expectations driven by better than expected vehicle sales;
--Strengthening of the company's interest coverage ratio approaching 2018;
--Capacity to maintain consistently neutral-to-positive FCF generation.
AG's liquidity is viewed as manageable during 2016-2017, as the company will take the option to capitalize interest expenses during this period. Starting in 2018, the company's capacity to maintain adequate liquidity will require consistent improvement in cash flow generation measured as EBITDA coupled with neutral-to-positive FCF levels.
FULL LIST OF RATING ACTIONS
Fitch has upgraded AG's foreign and local currency IDRs as follows:
--Long-term Foreign currency IDR to 'CCC' from 'RD';
--Long-term Local currency IDR to 'CCC' from 'RD'.
Fitch has also withdrawn the 'C/RR4' ratings on AG's unsecured notes, which includes the US$400 million unsecured senior notes due in 2021 and the US$300 million due in 2023. At the same time, considering the terms and conditions of AG's recently executed debt exchange offer, Fitch has assigned a 'CCC-/RR4' rating to AG's US$422 million new senior secured notes due in 2021.
Additional information is available on www.fitchratings.com.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
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