Fitch Ratings has affirmed the ratings of Automotores Gildemeister S.A.'s (AG) as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BB';
--Local currency IDR at 'BB';
--USD400 million unsecured senior notes due in 2021 at 'BB'.
The Rating Outlook is Stable.
AG's credit ratings reflect the company's stable market position, solid brand recognition, and high margins. 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 11% and 17%, respectively, at the end of 2011. The ratings consider AG's ability to withstand competitive pressures based upon its market position, as the third largest auto distributor in Chile and the second most important importer and distributor in Peru. Also incorporated in the ratings is the company's unique business model, which combines importation, distribution, and retailing activities and has resulted in EBITDAR margins between 11% and 13.5% during the last few years.
The company benefits from the strong brand recognition of the vehicles it sells. Hyundai Motor Company (Hyundai), rated 'BBB'/ Positive Outlook by Fitch, is the most important brand sold and distributed by the company, accounting for approximately 70% of AG's revenues. The company's commercial tie to Hyundai is seen as stable as the commercial relationship between AG and Hyundai has existed for more than 20 years. AG is Hyundai's sole importer in Chile and Peru of passenger cars (PC) and light commercial vehicles (LCV). Based upon AG's success in managing the Hyundai brand, this commercial relationship, which is renewed every four years with the next renewal taking place in 2013, is expected to remain solid through the foreseeable future.
The ratings are constrained by the cyclicality of AG's business, moderate leverage, negative FCF generation during strong sales years due to increasing working capital needs, and limited diversification. The high working capital needs in AG's operations limit the company capacity to increase cash flow from operations (CFFO) during periods of significant expansion. During 2011, revenue increased by 34.3% and the company's CFFO was USD23 million, resulting in a low CFFO margin of 1.7%. Increasing working capital needs totaled USD114 million, as inventory levels increased by USD67 million during 2011. For 2011, calculations consider end of period and average exchange rates of CHP519.50 and CHP483.68 per USD, respectively.
The company's product mix is highly dependent upon Hyundai products, exposing the company to reputation risk and shortage supply risk associated with the Hyundai brand. In addition, the automobile business is AG's core business, generating approximately 90% of its total revenues. The company's geographic diversification is somewhat limited, as Chile represents about 65% of revenues, while Peru accounts for the remainder.
The Stable Outlook reflects Fitch's view that AG will maintain the positive trend in its operating results based upon its market position and brand recognition coupled with a positive business and macro economic environment in its main markets. The Stable Outlook also factors in the expectation that the company's gross adjusted leverage, measured by the total adjusted debt to EBITDAR ratio, will remain stable at around 3 times (x) and that the company will maintain an adequate liquidity and manageable debt profile in the short to medium term.
Shareholder- Friendly Actions Negative For Credit Quality:
From a credit perspective, Fitch negatively views AG's decision to increase the level of inter company loans by approximately USD33 million during 2011. This level represented 20%, 6%, and 140% of the company's cash, total on-balance debt, and CFFO. 2011. AG's ratings incorporate the expectation that the company will not materially increase inter company loans in the future. Deviations from this expectation would likely result in a negative rating action.
Business Expected to Grow between 15% and 20% during 2012, Supported by Volume Trend:
The ratings incorporated the expectation that the favorable macroeconomic-driven sales environment in the company's markets, Chile and Peru, will continue in the medium term, with rising demand for new cars. Total new cars sold in Chile and Peru during 2011 were 340,801 and 119,540 units, respectively, representing increases of 17.4% and 17%, respectively, versus 2010. After growing 6% and 6.9%, during 2011, the Chilean and Peruvian economies are forecasted to post growth rates of 4.1% and 5.4%, respectively, during 2012.
The company's 2011 revenue was USD1.4 billion, representing an increase of 34% from the prior year. For 2012, the company's revenue is forecasted to continue growing between 15% and 20% driven primarily by higher volume. The company's 2011 total units sales, were 66,920 units, Fitch's base case is that AG will increase its sales volume by approximately 17% during 2012, while the company's EBITDAR margin is expected to remain stable at around 12%.
Adequate Liquidity, Refinancing Completion a Positive:
The company rebuilt its liquidity during the LTM period ended in March 2012 with the proceeds from the USD400 million senior notes, including the USD100 million reopening completed during the first quarter of 2012. At the end of December 2011, the company had USD160.9 million of cash (USD60 million as of December 2010) and USD204.2 million of short-term debt (USD154 million as of December 2010). After the completion of the recent reopening, AG's short-term debt at the end of March 2012 is expected to be around USD100 million, primarily composed of used credit lines and bank debt financing car imports. The company's flexible debt payment schedule post reopening is a positive factor. Other than the short-term financing, the company does not have any material debt payment due during 2012, 2013 and 2014. AG's main debt maturity is composed by the USD400 million senior notes issuance due in 2021.
Adjusted Gross Leverage Expected to Continue Below 3.5x:
The company's operations grew significantly during 2011. This growth was reflected in AG's cash flow generation, measured by EBITDAR, which increased by 54% during the period, from USD124 million (2010) to USD190 million (2011). The business growth also resulted in the company's total adjusted debt increasing by 49% during 2011. The increase in the company's total adjusted debt was primarily used to finance the company's 2011 negative free cash flow (FCF) of USD55 million and to improve its cash position from USD62 million (December 2010) to USD161 million (December 2011).
AG had USD620 million of total adjusted debt by the end of December 2011. This debt consists of USD524.5 million of on-balance debt including the senior notes due in 2021 and approximately USD95 million of off-balance lease adjusted debt (calculated as 7x annual rental expenses of approximately USD14.6 million). AG's total adjusted gross leverage, as measured by total adjusted debt versus total EBITDAR was 3.3x and 3.4x during 2011 and 2010, respectively. The company's gross adjusted leverage is expected to remain below 3.5x during the next 24 months ended in December 2013.
FCF to Remain Negative in 2012 Driven by Growing Business:
AG had a negative FCF of USD55 million during 2011; this level represented 3.9%, 34.1% and 10.5% of the company's LTM revenues, cash, and total on-balance debt by the end of Dec. 2011. Fitch's FCF calculation for the period considers cash flow from operations (CFFO) of USD23 million less capital expenditures (capex) and distributed dividends of USD49.7 million and USD28.8 million, respectively.
The ratings incorporate the view that the company's FCF will remain negative in the low single digits during 2012, driven primarily by business growth, increasing capex levels, and stable gross working capital cycle (account receivables and inventories) of approximately 155 days. Expectation on the company's 2012 capex level has been adjusted, and it is now forecasted to be around USD90, reflecting the opening of new own car sale centers as the business continues to expand. The expectation of 2012 capex levels that were previously incorporated in the ratings were lower at USD50 million. Distributed dividends should remain in the range of USD30 million to USD40 million per year.
Key Rating Drivers:
The ratings factored in the expectation that AG will maintain leverage and liquidity at the aforementioned levels. Fitch will view as a positive to credit quality that could trigger a positive rating action a combination of the following factors: improvement in the company's FCF generation resulting in consistent positive FCF levels coupled with solid liquidity and lower gross adjusted leverage.
Factors that could lead to the consideration of a negative rating action include a combination of the following factors: expectations by Fitch of total adjusted gross leverage being consistently at or beyond 4.0x, decline in sales volume due to a deteriorating business and political environment, shareholder friendly actions; and events negatively affecting its reputation with the Hyundai brand.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
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