Hong Kong, March 25, 2022 -- Moody's Investors Service has affirmed the Baa3 issuer rating of Nexteer Automotive Group Limited. The outlook remains stable.
"The rating affirmation reflects Nexteer's track record of maintaining its solid credit and business profiles as a steering systems provider, with its robust metrics and sustained net cash position providing a buffer against the cyclical nature of the automotive industry," says Gerwin Ho, a Moody's Vice President and Senior Credit Officer.
"Despite Nexteer posting lower profit margins in 2021 due to higher commodity and logistics costs and production disruptions because of a global chip shortage, Moody's expects the company's profitability to rise over the next 12-18 months as global auto sales grow and production efficiency improves," adds Ho.
RATINGS RATIONALE
Nexteer's rating reflects (1) the strong barriers to entry for its products; (2) the company's track record and global footprint; (3) the good growth of its electric power steering (EPS) product; and (4) Moody's expectation that Nexteer will maintain its sound credit metrics and strong liquidity.
On the other hand, Nexteer's rating is constrained by its: (1) concentration in terms of customer revenue; and (2) developing scale and geographic concentration.
Moody's expects Nexteer's revenue to increase by about 8%-10% from the level achieved in 2021 over the next 12-18 months, reflecting the contribution from new business wins and supported by a rise in global light vehicle sales.
The EPS business — which made up 69% of Nexteer's revenue in 2021— will continue to drive sales over the next 12-18 months, because of gains in market share and product portfolio expansion.
At the same time, Moody's forecasts Nexteer's profitability — as measured by its adjusted EBITA margin — will rise to about 3.2%-3.4% over the next 12-18 months from about 2.9% in 2021 as global auto sales increase and production efficiency improves as the global chip shortage eases.
Moody's projects the company's debt leverage will rise to about 1.4x-1.6x over the next 12-18 months from about 0.7x in 2021 as the company borrows to fund its investments and operations while its EBITDA lifts on the back of higher revenue and profitability.
Moody's expects Nexteer to further grow its revenue scale over the next three to five years, and gradually improve its customer and geographic diversity. Nonetheless, Moody's expects Nexteer's revenue exposure to North America, which reached 58% in 2021, to remain high during the same period.
Nexteer's rating continues to benefit from its 23% effective stake ownership by Aviation Industry Corporation of China, Ltd. (AVIC), as of 30 June 2021, which provides Nexteer with customer introductions, business partnership introductions and the facilitation of funding access.
Nexteer's liquidity position is strong, as reflected by its cash to short-term debt coverage of over 3x and net cash position as of the end of 2021. In April of last year, the company redeemed its USD250 million bond that was due in November.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE CONSIDERATIONS
Nexteer's exposure to moderately negative environmental and social risks reflects the nature of its business, which is predominately driven by automotive parts.
Nexteer's governance risks are also moderately negative, reflecting the company's high ownership of voting shares by its controlling shareholder and that a majority of its board members are non-independent. Such risks are partially offset by the company's conservative financial strategy and strong management track record.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on the rating reflects Moody's expectations that Nexteer will maintain its relationships with its key auto manufacturer clients and strong market position, and that it will continue to exercise prudent financial discipline.
Upward pressure on the rating could emerge if Nexteer (1) further improves its business profile by decreasing its customer and geographic concentration and expanding its business scale, while sustaining its strong credit metrics; (2) improves its profitability, as measured by EBITA margin, to high single digits on a sustained basis; and (3) maintains its prudent financial policy, with low leverage, good liquidity, and disciplined capital spending and acquisitions.
The rating could come under downward pressure if Nexteer (1) records a decline in its EBITA margin and a rise in debt leverage, as measured by debt/EBITDA, to above 2.0x-2.5x on a sustained basis; (2) demonstrates lower customer and geographic diversification, and fails to expand its scale; or (3) pursues an aggressive financial policy that leads to a deterioration in its credit metrics.
The principal methodology used in these ratings was Automotive Suppliers published in May 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1276105. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Headquartered in Auburn Hills, Michigan, and listed on the Hong Kong Stock Exchange in October 2013, Nexteer Automotive Group Limited manufactures steering and driveline systems. The company had 27 manufacturing plants across North and South America, Europe and Asia as of the end of June 2021.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Gerwin Ho
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Clement Cheuk Yiu Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
