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Fitch Assigns SMRP BV's EUR Bond 'BBB-' Final Rating
July 13, 2017 / 11:08 AM / 2 months ago

Fitch Assigns SMRP BV's EUR Bond 'BBB-' Final Rating

(The following statement was released by the rating agency) SINGAPORE/MUMBAI, July 13 (Fitch) Fitch Ratings has assigned Netherlands-based Samvardhana Motherson Automotive Systems Group BV's (SMRP BV, BB+/Positive) EUR300 million senior secured notes due 2024 a final rating of 'BBB-'. The final rating is in line with the expected rating assigned on 22 June 2017 and follows the receipt of final documents conforming to information already received. The rating on the euro notes includes a one notch uplift from SMRP BV's Issuer Default Rating (IDR) arising from security over assets in key SMRP BV group subsidiaries, which will be shared equally with existing secured notes and bank debt. SMRP BV intends to use the proceeds to repay debt and for general corporate purposes. The one-notch uplift applied to the euro notes may be removed if the superior secured debt falls below a EUR110 million threshold (upon exercise of call options available for EUR500 million and USD400 million secured notes) and a subsequent amendment to the intercreditor agreement, which will require approval of the existing bank lenders, paves the way for the release of security over the assets - as defined in the bond documentation. This "fall-away" security structure, which could materialise in 2019 at the earliest, may allow up to EUR110 million of secured debt ranking superior to the notes. However, Fitch believes the low secured debt threshold defined as a precondition for the release of security in comparison with SMRP BV's EBITDA (more than EUR300 million in the financial year ended March 2017 (FY17)) will limit the secured debt/consolidated operating EBITDA ratio to below 2.0x-2.5x, which is commensurate with Fitch's guidelines for low structural subordination. As a result, the senior unsecured debt in the resultant debt structure will not face significant subordination. KEY RATING DRIVERS Linkages to Samvardhana Motherson Group: Fitch analyses Motherson Sumi Systems Limited (MSSL), its largest shareholder Samvardhana Motherson International Limited (SMIL) and their 51:49 joint venture, SMRP BV, as a single economic entity, as SMIL effectively controls more than 50% of the economic interest in the MSSL group and because of the companies' senior management overlap. Fitch assesses the operating, financial and strategic linkages between SMRP BV and SMIL as strong and has based SMRP BV's IDR on SMIL's consolidated financial profile, which has been adjusted to include 100% of the businesses of MSSL and SMRP BV to take into account the large minority shareholders in MSSL. Leading Player with Integrated Capability: MSSL's business in India supplies wiring harnesses for a dominant share of passenger vehicles manufactured in the country. The company's acquisition of PKC Group Plc in March 2017 has given MSSL a leading position in the commercial-vehicle wiring harness market across North America, Europe, South America and China. SMRP BV's mirror business under Samvardhana Motherson Reflectec (SMR) is one of the top global suppliers of exterior mirrors, with a 24% market share by sales. Samvardhana Motherson Peguform (SMP), the polymer business, accounts for 20% of global bumper sales, 11% of dashboard sales and 28% of door panel sales in the premium segment. MSSL's market share has increased over the last several years, supported by its ability to provide a full spectrum of solutions, including R&D, tooling, manufacturing and assembly, to meet customers' complex supply-chain needs with high quality and reliability. Well-Diversified Business Profile: MSSL's businesses serve over 750 vehicle programmes across more than 50 original equipment manufacturers (OEM) globally. Each business is diversified across OEM customers, vehicle programmes within an OEM and geography for each programme. This is an important business strength, given the cyclical and competitive nature of the automotive industry. MSSL has a balanced geographic presence: 20.7% of sales came from the Americas, 53.7% from Europe and 25.7% from Asia-Pacific and Africa in FY17, including full-year revenue from PKC. Customer diversification has improved, with the top-five customers making up 47% of sales in FY17 (including PKC), compared with 53% in FY14. Strong Relationship with OEMs: SMRP BV has decades-long relationships with 14 of the top-15 global OEMs, which underscores its consistent quality and R&D record. This is important, as global OEMs are increasingly dependent on external auto-component providers and retain only high value-added parts to optimise capital. The company's solid customer relationships are a key business strength and help SMRP BV mitigate sector-specific risks, such as competition and weak negotiating power against large OEMs in pricing and pass-through of volatility in raw material prices. Strong Order Book: SMRP BV had an order book of EUR12.9 billion at FYE17 (FYE14: EUR7.7 billion), which Fitch believes supports revenue visibility in excess of 90% over the next three to four years, including 60%-70% that comes from models already in production. The order book is diversified across OEMs and vehicle programmes, mitigating uncertainty over the market reception of new launches. The association with top OEMs also reduces this risk, as manufacturers typically try to improvise and relaunch new platforms - which require significant upfront investment - rather than writing-off the initial investment altogether. Low-Risk Growth Strategy: SMRP BV has achieved strong, profitable growth by successfully integrating attractively priced acquisitions and a low-risk organic expansion strategy. The company has been able to improve profitability at SMR and SMP by focusing on cost efficiency and investing to expand in-house manufacturing capabilities. SMRP BV's expansion plans benefit from orders already secured from customers, lowering risk. MSSL is likely to make large acquisitions in line with its strategic vision, but Fitch expects the company to adhere to its announced long-term leverage target. Improving Financial Profile: MSSL has maintained reasonable financial leverage, with an adjusted net debt/operating EBITDAR ratio of 2.6x in FY14-FY16, while achieving healthy growth and steady margin improvement. This highlights its disciplined approach in evaluating investment opportunities. The company has low maintenance capex requirements (INR6 billion-7 billion annually) and a dividend policy that pays less than 40% of net income. FCF generation has been negative due to organic expansion of SMR and SMP, but Fitch expects FCF generation to improve once capex normalises over FY18-FY19. Fitch expects MSSL's robust order book to support continued EBITDA increases, which should lower financial leverage to levels commensurate with a low investment-grade rating over the next two to three years. Solid Financial Flexibility: MSSL benefits from a robust liquidity profile, long-dated debt maturities and diversified access to banks and capital markets. MSSL's strong financial flexibility allows it to support customers when they set up production facilities in new markets and be involved in early design and development work. DERIVATION SUMMARY MSSL's large scale, leading market position in its product categories and adequate diversification across OEM customers, geographies and products positions it well with respect to peers such as Metalsa, S.A. de C.V. (BBB-/Stable), Nemak, S.A.B. de C.V.(BB+/Positive) and Faurecia S.A. (BB/Stable). MSSL appears more leveraged than peers because of its expansion capex, but Fitch's forecasts for the company's FCF profitability and leverage profile in the post-expansion years (FY20 onwards) compare well against peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - High single-digit revenue growth (except FY18, when full-year consolidation of PKC will lead to around 21% growth), supported by a strong order book. - Gradual EBITDA margin improvement to 10%-11% over the next two to three years, driven by increasing scale and investments to improve in-house value addition. - Capex intensity, measured as percentage of sales, to remain high at around 5.5%-6.0% through to FY18, before declining to around 4.0% in FY19. - MSSL dividend payout to remain below 40% of net income. RATING SENSITIVITIES Developments that may, individually or collectively, lead to positive rating action include: - MSSL consolidated adjusted net leverage - defined as total adjusted net debt/operating EBITDAR, after Fitch's adjustment for minorities and factored receivables and suppliers' acceptances - improving to below 2.0x on a sustained basis. - MSSL consolidated FCF margin improving to greater than 1.0% on a sustained basis. - MSSL maintaining or improving its business diversification. Developments that may, individually or collectively, lead to the Outlook being revised to Stable: - Inability to achieve the positive guidelines above. LIQUIDITY MSSL has a robust liquidity position, with no significant debt maturities before FY22. The company had INR49.9 billion of unrestricted cash and INR32.9 billion of available committed bank facilities at end-March 2017 (MSSL: INR8.9 billion; SMRP BV: INR24 billion). This was more than sufficient to meet INR10.6 billion in near-term debt maturities and the modest level of FCF deficit through to FY18. The liquidity profile is strengthened by Fitch's expectation of positive FCF from FY19 and SMRP BV's access to both bank and international debt capital markets. Contact: Primary Analyst Hasira De Silva, CFA Director +65 6796 7240 Fitch Ratings Singapore Pte Ltd One Raffles Quay South Tower #22-11 Singapore 048583 Secondary Analyst Snehdeep Bohra Associate Director +91 22 4000 1732 Committee Chairperson Vicky Melbourne Senior Director +612 8256 0325 Date of Relevant Rating Committee: 14 June 2017 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com. 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