Fitch Affirms Autometal's IDR at 'BB'; National Scale Rating Upgraded to
SAO PAULO -- January 8, 2014
Fitch Ratings has affirmed Autometal S.A.'s (Autometal) Local and Foreign
Currency Issuer Default Ratings (IDRs) at 'BB', and has upgraded its National
Scale Rating to 'AA-(bra)'. The Rating Outlook is Stable. A complete list of
the rating actions follows at the end of this press release.
KEY RATING DRIVERS
The upgrade of Autometal's National Scale Rating reflects Fitch's view that
the company is stronger in its current 'BB' IDR. Autometal has improved its
business profile following the on-going acquisition of Mahindra CIE Automotive
(Mahindra CIE) and is transitioning from a medium-sized regional player to a
large-sized global competitor in the auto-parts industry. The rating action
also incorporates that the company will be able to maintain a strong liquidity
position and low leverage ratios after the conclusion of this acquisition,
compared to its peers on the same rating category. Fitch expects that
Autometal will successfully integrate Mahindra CIE's operations.
Autometal's IDRs are constrained by its exposure to the cyclical automotive
industry, changes in consumer trends and the volatility of raw material costs.
Additional negative rating factors include the weaker credit profile of
Autometal's parent company, CIE Automotive (CIE), and the expectation that
Autometal will maintain a high dividend payout ratio of 50% in the medium
term. Further considerations include small and strategic acquisitions as part
of company's growth strategy.
The Stable Outlook reflects Fitch's expectation that Autometal will manage to
recover from the short-term pressures on margins due to the acquisition of
Mahindra CIE's assets. Mahindra CIE brings new original equipment
manufacturers (OEMs) and car-platforms to Autometal's operations, albeit at
lower margins. The larger presence in markets that are either growing (China
and India) or rebounding (Mexico and U.S.) also contribute to the margins'
recovery. The ratings incorporate the view that the company will maintain a
net adjusted leverage ratio below 1.5x and solid liquidity reflected in a
minimum cash position of BRL450 million.
ACHIEVABLE SYNERGIES WITH MAHINDRA CIE
Fitch believes Autometal will manage to improve the profitability of its new
subsidiary, Mahindra CIE, over the next three to four years. The agency
estimates that EBITDA margins will rise to 13.5% in 2015 from 12.5% expected
for 2014 (versus 16.8% in 2012). Mahindra CIE has pro forma EBITDA margins of
8% compared with Autometal's standalone 17%. Opportunities lie with Mahindra
CIE's plants in Germany, with current negative margins in comparison to 11%
two years ago. Autometal's controller, CIE, has plants in the same region with
14% EBITDA margins and has already transferred personnel and expertise to the
plants inherited from the Mahindra Group. Fitch estimates the synergy gains
will come from right-sizing the idle capacity according to the local demand as
well as taking advantage of the attractive labor costs in India. In addition,
Fitch expects the U.S. car market to keep a positive trend in 2014, and Europe
has shown early signs of recovery. Fitch also expects Autometal will produce
better-margin products in China as of 2014.
CREDIT METRICS TO REMAIN AT CONSERVATIVE LEVELS
Fitch expects Autometal to manage its leverage ratios at low levels after the
conclusion of Mahindra CIE acquisition. Total adjusted net debt to EBITDAR
ratio of Autometal may increase up to 1.5x in 2013 and 2014 from -0.1x in
2012. On top of the USD146 million paid to the Mahindra Group and its minority
shareholders in October 2013, Autometal received USD43 million of additional
debt in June 2013 from three plants coming from CIE Automotive and USD100
million loan in December 2013 from the incorporation of part of Mahindra
subsidiaries. An additional USD80 million debt is expected for April 2014 with
final regulatory approvals of the Mahindra acquisition. Fitch estimates the
approvals will be granted without major issues. In the last 12 months (LTM)
ended on Sept. 30, 2013, total adjusted debt/EBITDAR was 3.6x, while net
adjusted debt/EBITDAR was 1.3x.
NEGATIVE FREE CASH FLOW UNTIL 2015
Autometal's free cash flow (FCF) should remain negative in the next couple of
years. The incorporation of Mahindra CIE will pressure Autometal's
consolidated EBITDA margins and working capital needs mostly in 2014. In the
LTM ended on Sept. 30, 2013, cash flow from operations (CFFO) of BRL37 million
showed a decline from the BRL111 million in 2012 as a result of higher working
capital requirements of BRL127 million coming from assets acquired.
Considering capital expenditures of BRL144 million and dividends of BRL63
million, FCF was negative at BRL170 million.
HIGH LIQUIDITY POSITION
Autometal's financial profile should continue to present robust liquidity
positions and strong short-term debt coverage ratios. At the end of September
2013, cash and marketable securities of BRL734 million compare favorably with
short-term debt of BRL101 million and total adjusted debt of BRL1.2 billion,
leading to a short-term coverage ratio of 7.3x. Fitch expects the company to
manage its liquidity position above BRL450 million and its debt maturity
profile in order to reduce refinancing risks.
DIVERSIFIED BUSINESS MODEL
Autometal will strengthen its business profile following the expected full
incorporation of Mahindra CIE's facilities in April 2014, reaching 38 plants
in 10 countries spread across Latin America, Europe, and Asia. The company
currently produces auto-part components such as plastic molding, metal
mechanic, painting, and stamping to OEMs and a series of auto-industry
suppliers. Revenues come from more than 100 car-platforms, each one
contributing with no more than 7% of total sales. A car platform is the
structure in which the car is built and could be shared with different
vehicles. Sales with the top three OEMs clients, namely Volkswagen, Ford, and
Fiat/Chrysler that represent 48% of the consolidated revenues are expected to
drop to 30%, following the deal. Also, heavy vehicle products will increase to
40% of sales from 10% currently, which will improve revenue diversification.
Financial flexibility, global presence, and a decentralized management help
Autometal to face eventual cycles of the auto industry.
CIE CREDIT PROFILE STILL CONCERNS
Fitch expects CIE to reduce its consolidated net leverage to 2.0x post
Mahindra deal from 2.9x in 2012. CIE's leverage rises to an estimated 2.9x,
excluding Autometal. The improvement on CIE's indebtedness comes from a USD114
million capital injection, while maintaining the same level of gross debt. As
part of the Mahindra CIE creation, the Mahindra & Mahindra Group acquired
13.5% of CIE, being 9.5p.p stake from CIE's treasury shares plus 4p.p economic
interest from a capital increase. CIE and Autometal cannot guarantee each
other's debt, but Autometal needs to distribute at least 50% pay-out rate
Negative rating action would be triggered if Autometal's management deviates
from its leverage target of 2.5x and/or if negative trends in cash flow
generation due to declining sales volumes materialize. Shareholder friendly
actions that result in higher than expected dividend distributions, and large
acquisitions that change Autometal's capital structure would also be viewed as
negative to the company's ratings.
Positive rating action could occur if synergies from Autometal's acquisitions
are above Fitch's expectations and results in material improvements in its
credit metrics, with stronger free cash flow generation and improved credit
metrics. Favorable changes in import and fiscal policies that strengthen
demand for Autometal's products and a substantial improvement in CIE's credit
profile on a standalone basis would also be viewed as positive to Autometal's
Fitch has taken the following rating actions:
--Foreign Currency IDR affirmed at 'BB';
--Local Currency IDR affirmed at 'BB';
--Long-Term National Scale Rating upgraded to 'AA-(bra)' from 'A+(bra)';
--Long-Term National Scale Rating for the first debenture issuance in the
amount of BRL250 million due 2017 upgraded to 'AA-(bra)' from 'A+(bra)'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Scale Ratings Criteria' (Oct. 30, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
National Scale Ratings Criteria
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Renato Donatti, +55-11-4504-2215
Fitch Ratings Brasil Ltda.
Alameda Santos, 700 - 7 andar
Sao Paulo, Brazil
Alexandre Garcia, +55-11-4504-2616
Mauro Storino, +55-21-4503-2625
Elizabeth Fogerty, +1 212-908-0526
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