Fitch Ratings affirms Nemak,
The National Long-Term Rating is affirmed at 'AA(mex)'. The Rating Outlook is Stable.
Nemak's ratings reflect its strong competitive position in its main products of cylinder heads and engine blocks, particularly in
Key Rating Drivers
Strong Global Business Position: Nemak's strong business position in
Downward Leverage Trend: Fitch expects net leverage to be between 2.3x and 2.5x by YE 2022 as margins improve in the second half of the year. This follows a net leverage decrease from 2.8x in 2020 resulting from revenues and EBITDA recovering from pandemic lows. This recovery was driven by higher revenue per unit and costs reduction programs that improved operating margins. Beyond 2022, Fitch forecasts the company to reduce leverage to below 2x as semiconductor shortages ease and industry production increases to meet the pent-up demand for light vehicles. The company should be well positioned to manage inflationary pressures and constrained industrywide production as well.
Investment in Electrification: The company is proactively addressing the market's transition toward electrification, with total awarded business to-date in its e-mobility and structural applications segment amounting to approximately
Improved Cash Flow Generation: Nemak should experience a reduction in working capital requirements and return to neutral FCF in 2022 as a result of inventory rationalization. In 2021, inventory days surpassed 90 days versus the historical 60 days levels. This inventory build-up was an important factor in the company's realizing negative FCF for the year. Fitch expects the company will be able to bring this back to historical levels over the ratings horizon and return to positive FCF generation.
Comfortable Debt Maturity Profile: Nemak successfully issued two new sustainability linked bonds in USD and EUR in 2021, effectively extending debt maturities of over
Derivation Summary
The complexity and technological innovation of Nemak's aluminum castings give it a strong competitive position, allowing it to operate as a sole supplier to OEMs in 90% of the products it sells. Nemak's business profile compares well with
Nemak's business profile is similar to those of
Nemak's strong competitive position and its core focus on light vehicles, whose demand is considered more stable than heavily cyclical commercial and off-road vehicle segments, mitigate Nemak's relatively lower geographic, customer and product diversification when compared with Dana.
Nemak's profitability seats between
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Consolidated equivalent unit volumes grow between 2%-2.5% in 2022, increasing to 8% on 2023 and 5% afterwards.
Inventory levels will normalize to historical values in 2022 from over 90 days in 2021 to just over 60 days from 2022 forward.
EBITDA of approximately
Capex at company guidance of
Dividend policy accommodates deleveraging.
The company continues to rollover short term debt and has an implicit average interest expense between 5%-6%.
Effective tax rate at 30%.
Mexican peso exchange rates do not weaken significantly below MXN22/
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
A rating upgrade in the near term is unlikely considering Nemak's business and financial profile;
Gains in product, customer or geographical diversification;
Sustained net debt/EBITDA solidly below 1.5x;
Sustained gross EBITDA leverage solidly below 2x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A rapid transition of the industry to electric vehicles in
A loss of competitiveness in the supply of precision cast aluminum parts;
Sustained net debt/EBITDA above 2.0x;
Sustained gross EBITDA leverage above 2.5x.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Sound Liquidity: Nemak's cash position of
Nemak has a flexible dividend policy, reducing dividend payments in 2019 and revoking dividends scheduled for 2Q20, 3Q20 and 4Q20. Total dividends in 2020 were
The company issued
Issuer Profile
Nemak is the largest global supplier of cylinder heads and engine blocks for automobiles and light trucks. Nemak's product portfolio also comprises battery and electric-motor housings used in hybrid and fully electric vehicles. The company has an important presence in
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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