NEW YORK--(BUSINESS WIRE)--Fitch Ratings has downgraded the ratings of Automotores Gildemeister S.A.'s (AG) as follows:
--Foreign currency Issuer Default Rating (IDR) to 'BB-' from 'BB';
--Local currency IDR to 'BB-' from 'BB';
--USD400 million unsecured senior notes due in 2021 to 'BB-' from 'BB';
--USD300 million unsecured senior notes due in 2023 to 'BB-' from 'BB'.
The Rating Outlook is Stable.
The rating downgrade reflects AG's capital structure deterioration and incorporates Fitch's revised expectations for the company's financial leverage management. The company's gross adjusted financial leverage, measured as total adjusted gross debt to EBITDAR, has increased as a result of the continued negative free cash flow (FCF) trend resulting from low operational margins, slow inventory rotation and high dividend payments.
The Stable Outlook reflects Fitch's view that AG will maintain positive operating results due to its market position and brand recognition. The Stable Outlook factors in the expectation that the company will manage its adjusted gross leverage to around 5.0x during the short- and medium-term and that the company's debt profile will remain manageable with low short-term debt relative to its liquidity.
AG's credit ratings continue to reflect its stable market position, solid brand recognition, and the company's adequate liquidity. The ratings are constrained by AG's business cyclicality, high leverage, negative FCF, and limited product diversification. The ratings also consider AG's high working capital needs, which limit its capacity to increase cash flow from operations (CFO) as business expands.
KEY RATING DRIVERS:
Negative FCF Trend:
The company's FCF generation has deteriorated during the last two years ended December 2012. AG reached negative FCF levels of USD225million in 2012 and USD55 million in 2011. During 2012 the negative FCF was driven primarily by lower margins, high working capital requirements of USD135 million, capital expenditures of approximately USD108 million, and dividend payments of USD49 million. The company's lower EBITDAR margin of 9.2% in 2012, versus 12.4% in 2011, reflects some adjustments in the terms and conditions offered by the company's main original equipment manufacturer (OEM) - Hyundai Motor Company (Hyundai) - as well as a more challenging business scenario faced in the Chilean market, where the car industry's total sales remained relatively flat at 341,000 units sold during 2012.
AG's higher working capital levels reflected its slowing inventory rotation with inventory turnover ratios of 94 days, 108 days, and 128 days in 2010, 2011, and 2012, respectively. The company's 2012 paid dividends of USD49 million represent a material level relative to the company's EBITDA (USD144 million) and indicates that the company's financial strategy maintains a focus on shareholders.
High Adjusted Gross Leverage of 4.6x:
The company's operations grew significantly during the last two years ended December 2012, resulting in an EBITDAR increase to USD161 million in 2012 from USD124 million in 2010. The business growth also resulted in a total adjusted debt increase of 75% during the 2010-2012 period. The incremental debt was primarily used to finance the negative FCF during this period.
AG had USD733 million of total adjusted debt by the end of December 2012. This debt consists of USD615 million of on-balance sheet debt and approximately USD118 million of off-balance sheet lease adjusted debt - calculated as 7x annual rental expenses of approximately USD17 million. AG's total adjusted gross leverage, as measured by total adjusted debt to total EBITDAR, was high at 4.6x for the year ended December 2012, a significant increase from the 3.3x and 3.4x reported during 2011 and 2010, respectively.
Adequate Liquidity:
The company rebuilt its liquidity during January 2013 with the proceeds from its USD300 million senior notes - second issuance. At the end of December 2012, the company had USD47 million of cash and USD166 million of short-term debt. After the completion of the second issuance, AG's short-term debt at the end of March 2013 is expected to be around USD30 million, primarily composed of used credit lines and bank debt financing for car imports. Positively considered is the company's flexible debt payment schedule after the second bond issuance. Other than the short-term financing, the company has no material debt payment due during 2013 and 2014. AG's main debt maturity is composed of the USD700 million senior notes issuance due in 2021 (USD400 million) and 2023 (USD300 million).
Market Position & Brand Recognition Incorporated:
Hyundai is the most important brand AG sells and distributes, accounting for approximately 70% of its revenues. The commercial ties between the company and Hyundai Motor Company (Hyundai), rated 'BBB+', Stable Outlook by Fitch, remain stable. This commercial relationship has existed for more than 20 years, and it is renewed periodically. AG's business position in the automobile distribution and retailing industry within Chile and Peru is seen as sustainable in the medium term, with market shares in each of these markets of approximately 10% and 15%, respectively, by the end of 2012. The company's product mix is highly dependent on Hyundai products, exposing the company to reputation risk and shortage supply risk associated with the Hyundai brand, which represents approximately 70% of the company's total revenues.
Favorable Business Environment Supports Growth Expectations:
The ratings incorporated the expectation that the favorable macroeconomic-driven sales environment evidenced during the last years in Chile and Peru will continue in the medium term, with demand for new cars keeping their positive trend. Total new cars sold in Chile and Peru during 2012 were 341,000 and 166,000 units, respectively, representing an increase of 0% and 39% over 2011 levels. After growing 5.9% and 5.2%, respectively, during 2012, the Chilean and Peruvian economies are forecasted to post growth rates of 4.7% and 6.2% during 2013. The company's 2012 revenue was USD1.6 billion, representing an increase of 11% over 2011 levels. For 2013, the company's revenue is forecast to continue growing around 15% driven primarily by volume increases.
RATING SENSITIVITIES:
Leverage management and FCF trend are the main rating drivers. AG's ratings could be positively affected by significant improvement - above expectations already incorporated - in its cash flow generation and leverage metrics.
A combination of the following factors could trigger a positive rating action: improvement in the company's FCF generation, reverse of the increasing trend in the company's gross adjusted leverage to levels around 3.5x while maintaining low short-term debt relatively to the cash position, and limiting dividends to the minimum required by Chilean laws.
Factors that could lead to a downgrade include a combination of the following factors: adjusted gross leverage consistently at or beyond 5.5x, decline in sales volume due to a deteriorating business and political environment, shareholder-friendly actions; and events that negatively affect its reputation with the Hyundai brand.
Continued negative FCF trend, increasing financial leverage, with important levels of paid dividends and/or intercompany loans, relative to the company's EBITDA, would likely result in a downgrade.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=790081
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