Fitch Ratings has revised the Rating Outlook on Mexican auto parts manufacturer Nemak,
Fitch has affirmed Nemak,
The Negative Outlook reflects Fitch's expectation that leverage will remain above the downgrade sensitivities over the medium term. The de-leveraging process may take longer to materialize as a result of moderating growth in the electric vehicle (EV)/structure and chassis (SC) business segment, which has been the focus of the company's major investments. Fitch expects to resolve the Outlook depending on whether or not the company is able to reach leverage metrics that are more consistent with its current rating.
Nemak's ratings reflect its strong competitive position in its main products of cylinder heads and engine blocks, particularly in
Fitch considers the company well-positioned to navigate the challenges faced by the automotive industry stemming from continued inflationary pressures, the transition into EVs, and production constraints from a recovering supply chain.
Key Rating Drivers
Strong Global Business Position: Nemak's status in
Leverage to
EV Transition at Slower Pace: Fitch believes de-leveraging will extend beyond that previously anticipated. Recent market developments point to a significant slowdown in the growth of EV sales. Consequently, we expect Nemak's recent investments and growth perspectives in this segment to decelerate. Awarded business to date in its EV/SC applications segment grew more slowly in 2023, going from
Nemak is targeting
FCF Turning Positive: Fitch expects FCF to be slightly negative to flat in 2024, and to turn positive in 2025 as the company reduces capex. Nemak has a flexible dividend policy that accommodates cash flow generation for the purposes of maintaining healthy liquidity and improving leverage metrics.
Comfortable Debt Maturity Profile: Nemak has approximately
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 its products. Nemak's business profile compares well with
Metalsa is focused on light truck and commercial vehicle frames that represent close to 80% of its sales, and is regionally concentrated in the North American market where it obtains over 80% of its revenue.
Nemak's business profile is similar to those of
Nemak's strong competitive position and its core focus on light vehicles - demand for which is considered more stable than the heavily cyclical commercial and off-road vehicle segments - mitigate its relatively lower geographical, customer and product diversification compared with Dana.
Nemak's profitability sits between that of
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer Include:
Consolidated equivalent unit volumes to grow by at least 3% in 2024 and 1.8% in 2025;
EBITDA surpasses
Capex remains at or below
FCF improves to neutral or slightly negative in 2024, then becomes positive beyond that;
Dividend policy accommodates deleveraging;
The company continues to partially roll over short-term maturities;
Mexican peso exchange rates versus the US dollar between 18-18.5.
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 profiles;
Gains in product, customer or geographical diversification;
Sustained net debt/EBITDA solidly below 1.5x;
Sustained gross EBITDA leverage solidly below 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A rapid transition of the industry to EVs, and growing capex without a commensurate increase in Nemak's electric housings and structural components contracts;
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
Liquidity and Debt Structure
Sound Liquidity: Nemak's cash position of around
Nemak has a flexible dividend policy that is sensitive to positive cash flow generation. It paid no dividends in 2023, and does not plan any in 2024. Nemak maintains access to bank lending, with an additional
The company has a comfortable debt maturity profile, with USD
Issuer Profile
Nemak is the largest global supplier of cylinder heads and engine blocks for automobiles and light trucks. Its product portfolio also comprises battery and electric-motor housings used in hybrid and fully electric vehicles.
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
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' 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. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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