Fitch Affirms Metalsa at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed Metalsa, S.A. de C.V.'s (Metalsa) local and foreign currency Issuer Default Ratings (IDRs) and its senior unsecured 2023 notes at 'BBB-'. The Rating Outlook is Stable.
Metalsa's ratings reflect its strong business position as a Tier-1 supplier of Body on Frame (BOF) light vehicle chassis and structural parts for commercial vehicles, increased geographic diversification, long-term relationships with customers and management's commitment to maintaining a solid financial profile. The company's ratings are limited by industry cyclicality, customer concentration with three main clients, revenue concentration in North America and lower expected through the cycle profitability as a result of its expanded product mix.
The Stable Outlook considers that Metalsa will continue benefiting from positive momentum in the North American light vehicle market that will more than offset weak expected South America new vehicle demand.
KEY RATING DRIVERS
Strong Business Position
Metalsa is a Tier 1 supplier of structural components for light and commercial vehicles. Its ratings reflect the company's important market position as the largest supplier of light vehicle BOF chassis in the Americas. Metalsa is also one of the main suppliers of commercial vehicle side rails in both North America and Brazil. In 2013, the company acquired ISE Automotive Group GmbH (ISE), a supplier of light vehicle body and chassis components, increasing its product line-up and expanding its customer relationships and geographical presence into Europe and Asia.
Solid Demand for Main Products
Metalsa derived 69% of its revenues from the sale of light vehicle frames which are used in both full and midsize pickup trucks. Continued low U.S. gasoline prices have bolstered U.S. auto sales, particularly those of pickups and crossover sport-utility vehicles. Since June 2014, when gasoline prices peaked, consumer demand for this type of vehicle has climbed sharply, gaining close to 5% market share primarily from passenger cars. Fitch believes demand for pickup trucks will remain robust for the next few years considering a continued depressed outlook for gasoline prices before ultimately slowing to levels closer to those of the broad market. Total U.S. light vehicle sales should rise to about 17.5 million units during 2016. This represents a 1.7% increase from the 17.2 million reached in 2015. Fitch believes sales growth will eventually plateau at a level around 17 million for the next several years.
Margin Pressure Should Ease
Since 2013 the company has reported higher costs and expenses related to its acquired plants, as well as to pre-operating expenses of new projects. Higher costs and integration delays coupled with weak new vehicle demand in South America have pressured Metalsa's EBITDA margin from 14% in 2012 to just over 10% in 2015. Despite strong demand for Metalsa's products in North America, EBITDA has remained relatively flat for the last four years at around USD250 million. Fitch believes that the bulk of the integration and ramp-up costs has passed and that for 2016 EBITDA should expand to levels above USD300 million. This would imply EBITDA margins of around 13%, reflecting higher volumes and utilization rates and significant reductions in extraordinary costs and expenses.
Commitment to Maintaining a Solid Financial Profile
Metalsa's total adjusted debt to EBITDAR ratio, as calculated by Fitch to include intercompany payables owed to Metalsa's parent, Grupo Proeza, S.A.P.I. de C.V. was 1.9x in 2015, slightly below the 2.0x registered at year-end 2014. Fitch projects that total leverage will trend down to about 1.6x in 2016 and remain around 1.5x in the following years. During 2014, dividends paid to the parent company were USD35 million, slightly above USD31 million in 2013. No dividends were paid during 2015 which coupled with lower than anticipated capex allowed Metalsa to generate positive free cash flow (FCF) of USD69 million. This compares favourably to negative USD35 million in 2014. Fitch is projecting neutral FCF in 2016 and 2017 as some of the 2015 budgeted capex was deferred and dividend payments resume. Fitch expects FCF to turn positive in 2018.
Fitch's projections do not contemplate future equity contributions to further strengthen Metalsa's capital structure. However, the company's strong commitment to support a robust financial profile is considered in the ratings. Equity contributions for 2014 and 2013 were USD10 million and USD65 million, respectively.
--For 2016, production of BOF chassis in North America increase mid to high single digits, production of light vehicles in Brazil contracts double digits, Metalsa's volumes in Europe increase significantly as new products are launched, and total volumes grow low single digits in the following years;
--Profitability rises due to lower extraordinary cost and expenses and EBITDA remains above USD300 million in the intermediate term;
--FCF remains neutral during 2016 and 2017 before turning positive in 2018;
--Cash remains above year-end 2015 level over the intermediate term.
Negative rating actions could result from a combination of increased leverage or lower EBITDA generation that pressures the company's credit profile. Expectations beyond 2016 of sustained leverage above 1.8x (as measured by total adjusted debt to EBITDAR) or negative FCF generation could pressure Metalsa's credit quality and result in a rating downgrade.
Fitch does not expect positive rating actions in the medium term considering Metalsa's high leverage and low FCF generation in recent years. However, an established business position as a global Tier-1 supplier, and continued diversification away from its three main customers, in conjunction with low leverage levels, robust profitability and strong FCF could result in positive rating actions.
Metalsa's liquidity is considered strong. The company has no significant debt maturities until 2023. Its USD67 million cash balance compares to short-term debt (including current portion of capital leases) of USD25 million. In addition Metalsa has about USD220 million of undrawn committed credit lines mostly maturing in 2018.