Fitch Affirms Metalsa at 'BBB-'; Outlook Stable

MONTERREY, Mexico--(BUSINESS WIRE)-- Fitch Ratings has affirmed Metalsa, S.A. de C.V. (Metalsa)'s 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 in the Body on Frame (BOF) light vehicles and structural parts for commercial vehicles (CV) segments, increased geographic diversification of operations, 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 profitability as a result of its new product mix.

The Stable Outlook considers that the company will continue benefiting from positive momentum in the North American market that will mitigate weak expected new vehicle demand in South America, higher than expected pre-operating costs and lower than expected cash flow generation by the operations acquired during 2013.

KEY RATING DRIVERS

Strong Business Position and Customer Relationships

Metalsa's ratings reflect its important position in North and South American markets as well as its strong customer relationships. The company is the second largest supplier of light vehicle BOF chassis in North America, with a market share of approximately 44% and the largest in South America with an approximate market share of 50%. Metalsa is also one of the main suppliers of CV side rails in both North America and Brazil, with market positions of approximately 45% and 37%, respectively. As the sole supplier of chassis frames for the new Ford F-150 and GM Chevrolet Colorado trucks, Metalsa expects to become the largest supplier of light vehicle BOF chassis in North America.

Margin Pressure

During 2014 Metalsa continued to focus on implementing its integration plan of the acquired operations of ISE Automotive Group GmbH (ISE). Since 2013, the company has reported higher costs and expenses related to its acquired plants, as well as to pre-operating stages of new projects. Higher costs and integration delays coupled with weak new vehicle demand in South America have pressured Metalsa's EBITDA margin. Although Fitch expects the company to continue to face margin pressure, the effect on absolute EBITDA generation should be partially mitigated by solid U.S. demand for Metalsa's products. Continued low U.S. gasoline prices are expected to support U.S. auto sales, particularly those of pickups and sport utility vehicles. This should benefit sales of the company's largest customers and in turn be positive for Metalsa.

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 2.0x in 2014, slightly above the 1.9x registered at year-end 2013. Fitch is projecting that total leverage will peak at 2.3x in 2015 considering the company's capex plan but expects leverage to decrease as planned investments moderate. During 2014, dividends paid to the parent company were USD35 million, slightly above USD31 million in 2013. Free cash flow (FCF) improved, but was still negative USD35 million in 2014 compared to negative USD153 million in 2013. Fitch is projecting negative FCF in 2015 due to the company's capex plan, but expects growing positive FCF to support deleveraging in the following years. Fitch's projections do not contemplate any future equity contributions. 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.

Metalsa's liquidity is considered strong. At the end of 2014, the company had a cash balance of USD50 million compared to short-term debt (including current portion of capital leases) of USD33 million, no significant maturities for the next three years and USD276 million available under committed credit lines mostly maturing between 2016-2017. Robust positive free cash flow across the cycle coupled with total adjusted debt to EBITDAR below 1.8x and strong liquidity would be considered adequate for Metalsa's BBB- rating.

KEY ASSUMPTIONS

--Global economic conditions continue to improve at a modest pace, leading to low-single digit growth in global auto production.

--With improving vehicle production volumes, Metalsa's revenue grows and profitability rises in the intermediate term.

--Capital spending relative to sales declines over the intermediate term as spending for new assembly lines spreads out over time.

--FCF supports deleveraging in the intermediate term.

--The company's cash remains near the year-end 2014 level through the intermediate term.

RATING SENSITIVITIES

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkagehttp://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Statushttp://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=982641

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Fitch Ratings
Principal Analyst
Gilberto Gonzalez, CFA, +52 (81) 8399-9100
Associate Director
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, Mexico
or
Alberto De Los Santos, +52 (81) 8399-9100
Associate Director
Committee Chairperson
or
Sergio Rodriguez, CFA, +52 (81) 8399-9100
Senior Director
or
Media Relations, New York
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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