Fitch Affirms Rassini's IDRs at 'B '; Outlook Revised to Positive
The Rating Outlook was revised to Positive from Stable.
The revision of the Outlook to Positive reflects Fitch's expectations for a further strengthening of RA's business profile over the intermediate term resulting from increased market penetration in both suspension systems and brakes. It also reflects a credit profile that should continue to strengthen from debt repayment, enhanced liquidity, and growing funds from operations (FFO) due to favorable demand for pickups and large sport utility vehicles (as a result of low U.S. gasoline prices), and the gravitation of auto manufacturing to Mexico.
The 'B+' ratings continue to reflect RA's business position as a Tier-1 supplier of suspension and brake components, its geographic diversification, efficient operations, low cost structure and improved financial profile. The company's ratings are limited by the cyclicality of the automotive industry as well as RA's regional and customer concentration in North America, small scale and credit track record. In Fitch's view, under a stress scenario RA's financing options could be more limited than those available to industry peers.
KEY RATING DRIVERS
Strong Business Position
RA, a subsidiary of Rassini, S.A.B. de C.V. (Rassini), manufactures suspension and brake components for light and heavy vehicles, with leading positions in North America and Brazil. The company's main product line, leaf springs, which accounted for approximately 59% of total sales in 2014, has historically had a market share of over 90% in North America and an estimated share in Brazil of 65%. This strong position results from the group's specialization and technology development, close and longstanding relationships with customers through product design and development, its geographic location, and integrated operations.
Product Diversification Increasing
During 2014 Rassini was awarded new contracts totalling about USD600 million for the next five years. Approximately 18% of these agreements were related to Rassini's Brakes Division, where revenue growth has been the fastest. During 2014, the Brakes Division accounted for 28% of revenues, compared with 17% during 2012. Strong demand in 2015, as well as the downturn in the company's Brazilian operations, resulted in this figure reaching more than 31% in the first half of 2015 (1H15). Strong market penetration should allow Rassini to reach 26% of the North America brake market by 2016, which compares with 21% in 2014.
Customer and Regional Concentration
Rassini is considered an essential supplier to several original equipment manufacturers (OEMs), including General Motors Co., Fiat Chrysler Automobiles N.V. and Ford Motor Co. In 2014, Detroit's Big Three OEMs represented 71% of Rassini's total revenues; North America accounted for 80% and 88% of Rassini's total revenues and EBITDA, respectively. Both regional and customer concentration as percent of revenues increased as a result of organic growth in North America as well as plummeting vehicle demand in Brazil. Although Fitch expects the contribution from new contracts in North America to fully offset shrinking profitability in RA's Brazilian operations, the ability of the company to manage these operations so that they are not a drain on cash flow would be viewed positively for future upgrade considerations.
Leverage Reduction
Despite challenging conditions in Brazil, RA has continued to reduce its leverage level since 2011 as a result of higher EBITDA generation in North America as well as debt repayments. Total debt as of 2Q15 was USD192 million which compares favourably to USD215 million as of the second quarter 2014 and to USD206 million at the end of 2014. On a consolidated basis, Rassini's total debt/EBITDA for the last 12 months (LTM) ended June 30, 2015 was 1.7x and its net debt/EBITDA was 1.1x, which compare positively to year-end levels of 2x and 1.4x in 2014 and 2.6x and 2.0x in 2013. The company is evaluating multiple options to continue to grow, including organic investments or potential acquisitions. RA's ratings consider that the company's long-term capital structure will remain around management's target of 2x total debt/ EBITDA.
Continued FFO Expansion, Low FCF Visibility
Recurring FFO has increased from USD55 million in 2013 to USD77 million as of the LTM June 30, 2015. Fitch is projecting that FFO could grow to USD85 million in 2015 and USD92 million in 2016. Recurring FCF has been approximately USD33 million per year during the last few years as a result of low capex and no dividend payments. This has represented about 4% FCF margin which is more in line with those of higher-rated corporates. In coming years, extraordinary tax payments, potential dividends beyond those of 2015, or organic capex initiatives could reduce FCF generation. Fitch is projecting FCF will be around USD20 million in 2015 as a result of USD16 million of dividend payments during July. Continued positive FCF through the cycle would be viewed as positive to RA's credit quality.
KEY ASSUMPTIONS
--U.S. industry light vehicle sales rise in the low single digits during 2015.
--Beyond 2015, U.S. industry sales growth slows as sales levels near the peak and Brazil vehicle sales stabilize their downward trend before improving slowly.
--Near-term above-industry-average volume growth tied primarily to market share gains in North America for all product segments.
--Rassini's EBITDA margins rise significantly in 2015 as production volumes grow, the company's cost discipline is further enhanced by a strong USD and lower electricity costs in Mexico, and profit increases on new and replacement products.
RATING SENSITIVITIES
Negative rating actions could result from a combination of lower volumes and profitability as a result of material deterioration in North American light vehicle demand which translates into sustained leverage significantly above management's target of 2x. Weak operating cash flow and low cash balances, relative to short-term debt, could also result in negative rating actions.
Positive rating actions could result from larger scale, increased customer or geographic diversification, and sustained leverage levels at or below management's target of 2x in conjunction with a strong liquidity profile.
LIQUIDITY
Short-term debt of USD76 million is adequately covered by pro forma cash balance (after July 2015 dividend) of USD50 million as well as cash flow from operations of USD66 million. Debt maturities for the next three years total USD154 million, which accounts for 78% of Rassini's total debt. A more spread-out maturity profile would be consistent with those of Fitch-rated corporates with higher ratings and would be considered positive to credit quality.
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