Nexteer Automotive Group Ltd. And Notes Upgraded To #BBB-# On Sustained Reduction In Outlook Stable

Stocks and Financial Services Press Releases Thursday October 12, 2017 16:53
HONG KONG--12 Oct--S&P Global Ratings
HONG KONG (S&P Global Ratings) Oct. 12, 2017--S&P Global Ratings raised its long-term corporate credit rating on Nexteer Automotive Group Ltd. to 'BBB-' from 'BB+'. The outlook is stable.
We also raised our issue rating on Nexteer's US$250 million senior unsecured notes due 2021 to 'BBB-' from 'BB+'. Nexteer is a U.S.-based auto supplier.

The upgrade reflects our expectation that Nexteer will continue to reduce its leverage over the next 12-24 months. We estimate that the company will maintain a debt-to-EBITDA ratio of less than 1.5x even under severe market distress. In addition, we believe Nexteer will use a combination of financing channels to prevent a material surge in leverage in the event that it makes a large acquisition.

Nexteer's leverage at the end of 2016 was better than we had expected, with an adjusted debt-to-EBITDA ratio of 0.5x. That's because the company used its positive free operating cash flows (FOCF) to repay debt as it came due. Nexteer's operating cash inflow of US$312 million in the first half of 2017 was also significantly higher than that in the same period in 2016, while its total debt reduced by an additional US$36 million.

We expect Nexteer to continue generating significant FOCF over the next few years and use it to pay down debt. We believe that the company's strong order backlog of US$23.7 billion as of Sept. 30, 2017, will enable it to sustain its revenue growth and stable profitability. In addition, we expect Nexteer to have positive working capital inflow, given its fair bargaining power and ability to increase payables to match the increase in receivables. We also expect the company to follow a disciplined approach to capital expenditure and research and development (R&D).

In our view, Nexteer will maintain its market position and competitive advantage in the auto steering and driveline systems market. The company has been gaining share in the global market for electric-powered steering (EPS), its core product, through R&D efforts. Nexteer's current focus is on incorporating the advanced driver assistance systems and autonomous driving functionality into its core steering products, which we view as the latest market trend. Meanwhile, we expect Nexteer to benefit from long-standing relationships with major automakers (especially General Motors Co., Ford Motor Co., and Fiat Chrysler Automobiles N.V.). These automakers tend to work mostly with existing high quality suppliers due to the highly customized nature of products and the importance of consistent performance of the steering and driveline systems.

We continue to view Nexteer as a moderately strategically important subsidiary of Aviation Industry Corp. of China (AVIC). We also view Nexteer as an insulated subsidiary of AVIC, as seen in its highly independent financial performance and funding prospects, with limited operational participation from the parent. As of June 30, 2017, Nexteer has loans totaling US$212 million maturing in 2020 from Export-Import Bank of China. AVIC and Beijing E-town International Investment & Development Co. Ltd. guarantee these loans. In our opinion, Nexteer has sufficient financial capability to repay the loans and other financial liabilities on its own, given its sizable cash balance, solid bank relationships, and access to capital markets. As a result, our rating on Nexteer is one notch higher than AVIC's group credit profile without government support of 'bb+'.

The stable outlook reflects our view that Nexteer will continue to deliver steady revenue growth and profitability over the next 12-24 months. Our view is based on the company's sustained R&D and the improvement of its core steering and driveline systems, and underpinned by its stable market share and strong customer relationship. We also expect Nexteer to continue using its FOCF to pay down debt and improve its financial performance. The outlook also incorporates the very competitive nature of the global steering systems market, which prevents a quick improvement in Nexteer's market share or profitability.

We may lower the rating if Nexteer's debt-to-EBITDA ratio rises above 1.5x sustainably, as a result of major product quality issues that lead to large-scale recalls, or very large debt-funded acquisitions. We may also lower the rating if Nexteer's revenue and profitability fall significantly, due to intensified industry competition or the company failing to improve its key products to maintain its competitive advantage.

In addition, we may lower the ratings if we lower the group credit profile assessment on AVIC or the parent makes material adverse interventions in Nexteer's operation.

Though less likely over the next 12-24 months, we may raise the rating if Nexteer materially increases revenue and profitability by gaining core market share or successfully expanding into adjacent market segments, while maintaining a substantial net cash position.


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