Hong Kong, March 23, 2017 -- Moody's Investors Service has changed to positive from stable the outlook
on Nexteer Automotive Group Limited's Ba1 corporate family rating and
senior unsecured debt rating.
At the same time, Moody's has affirmed the company's Ba1 corporate
family rating and senior unsecured debt rating.
RATINGS RATIONALE
"The positive ratings outlook reflects Nexteer's track record of
improving its credit and business profile in terms of scale, geographic
and customer diversification, profitability, and debt leverage;
as well as our expectation that this trend will continue over the next
12-18 months," says Gerwin Ho, a Moody's Vice President
and Senior Analyst.
Moody's further expects Nexteer's revenue growth to moderate
to about 5% year-on-year in the next 12-18
months, after growing 14% year-on-year in 2016
to reach USD3.8 billion, reflecting our expectation of slower
growth in global auto sales.
The Electric Power Steering (EPS) business, which made up 62%
of the company's revenue in 2016, will continue to push sales
growth in the next 12-18 months, because of strong demand
for improved fuel efficiency in vehicles and the increasing penetration
of EPS in developing auto markets, such as China (Aa3 negative)
and Brazil (Ba2 stable).
At the same time, Moody's expects Nexteer's profitability,
as measured by its adjusted EBITA margin -- to further improve
to about 9.8% in the next 12-18 months.
The company's growth in scale and increased contributions from the
higher margin EPS business have improved its adjusted EBITA margin from
3.9% in 2013.
Nexteer's adjusted debt fell to about USD618 million at end-2016
from a high of USD784 million at end-2014. During the same
period, adjusted EBITDA rose to about USD470 million from USD267
million.
Accordingly, its debt leverage -- as measured by adjusted debt/EBITDA
-- declined to about 1.3x at end-2016 from
2.9x at end-2014.
Moody's expects the company's debt leverage to further decline
to around 1.2x in the next 12-18 months, which is
strong for its standalone credit strength.
"Nexteer's growth in scale is accompanied by the diversification
of its customer and geographic exposures," says Ho who is
also the Lead Analyst for Nexteer.
Nexteer reduced its revenue concentration in General Motors Company (GM,
Baa3 stable) and subsidiaries to 42% in 2016 from 54% in
2013 by expanding its customer base, especially in China.
In addition, it has shown a lower level of geographic concentration,
with revenue from North America declining to 65% in 2016 from 71%
in 2013. Its exposure to the fast-growing China market also
rose to 22% from 11% during the same period. Moody's
expects the company's China revenue exposure to trend towards 25%
in the next 12-18 months.
Nexteer's Ba1 corporate family rating incorporates its standalone credit
strength and a one-notch uplift, based on our expectation
of strong support from Aviation Industry Corporation of China (AVIC,
unrated), which holds an effective ownership of 32% in Nexteer
and is the ultimate owner of AVIC Automotive Systems Holding Co.,
Ltd. (AVIC Auto, unrated).
The strong support from AVIC includes operational support on business
development, customer introductions and access to funding and financial
support, in times of need.
AVIC has a track record of providing financial support, as demonstrated
by its guarantee on 51% of Nexteer's loan from The Export-Import
Bank of China (Aa3 negative). However, the significance of
the guarantee has diminished, as the amortizing loan, which
will mature in 2020, had fallen to represent about 43% of
Nexteer's total debt at end-2016 from 73% at end-2013.
Nexteer's standalone credit profile reflects (1) strong barriers to entry;
(2) the company's track record and global footprint; (3) the
good growth of its EPS product; and (4) an expectation that it will
maintain its sound credit metrics.
On the other hand, Nexteer's standalone credit profile is constrained
by (1) its concentration in terms of customer revenue; and (2) its
small scale and geographic concentration.
Nexteer's liquidity position is strong, as reflected in its
cash to short-term debt coverage of about 6.4x at end-2016.
The rating could be upgraded if Nexteer demonstrates the ability to:
(1) sustain its credit metrics, including maintaining profitability,
as measured by EBITA margins, and leverage, such that adjusted
debt/EBITDA stays below 1.5x-2.0x on a sustained
basis; (2) further improve its business profile, including
decreasing its customer and geographic concentration, and expanding
its business scale; and (3) maintain its prudent financial policy,
as characterized by low leverage, good liquidity, and disciplined
capital expenditures and acquisitions.
On the other hand, the ratings outlook could return to stable if
Nexteer (1) exhibits a decline in EBITA margins and a rise in debt leverage
above 2.0x debt/EBITDA; (2) lowers its customer and geographic
diversity and fails further to expand to its scale; or (3) pursues
an aggressive financial policy that leads to a deterioration of its credit
metrics.
Any weakening in support from its ultimate parent, AVIC, due
to a change in business strategy or regulatory reasons will be negative
for the ratings.
The principal methodology used in these ratings was Global Automotive
Supplier Industry published in June 2016. 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 23 manufacturing plants across North and South America, Europe
and Asia at end-2016.
At end-2016, Nexteer was 67%-owned by Pacific
Century Motors, Inc. (unrated), which is in turn 51%-owned
by AVIC Automotive Systems Holding Co., Ltd. (AVIC
Auto, unrated), and 49% owned by Beijing E-Town
International Automotive Investment & Management Co. Ltd.
(unrated), which is controlled by Beijing's municipal government.
AVIC Auto is 93% owned by Aviation Industry Corporation of China
(unrated), a Chinese central government-owned enterprise.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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
Vice President - Senior Analyst
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
SUBSCRIBERS: (852) 3551-3077
Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077