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Rating Action:

Moody's changes Nexteer's Ba1 ratings outlook to positive

 The document has been translated in other languages

23 Mar 2017

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

No Related Data.
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