Latin Finance - September/October 2011 - 80

Mexico automotive sector

drops to 275 basis points for leverage between 2.5-3.0 times, to optimistic about potential south of the border. 250 basis points for 2.0-2.5 times and to 225 basis points below “Growth into South America is a key factor in the growth two times. Covenant thresholds were set at 3.75 times leverage, of the Mexican market. Brazil and Argentina are growing very but will be lowered to 3.5 times in March. well in terms of sales and, due to various free trade agreements, The revolver, meanwhile, is available for three years and if Mexico is a good strategic platform to serve those markets,” utilized pays the same applicable margins as the term loan but says Bernard Swiecki, assistant director of the automotive communities partnership at the Center for Automotive Research. with tenors of six months or less. If the borrower doesn’t draw on the revolver it pays between 30%-40% of the applicable margin. Volkswagen Mexico also expanded its operations this year “This is the first loan since the restructuring and they have with the launch of its Beetle model from its plant in Puebla State. kept the same tenor and spread and took out the security that As with the other major manufacturers, Volkswagen posted backed the restructured loan,” a US-based banker says. “They healthy production rises in its Mexican operation for the second could have done it cheaper but I don’t think they don’t want to quarter in 2011 with a 59,767-unit increase year-over-year. take the risk, as leverage is still high.” While Hyundai has yet to announce the location or Still, Nemak is growing more aggressively than the industry investment cost of its planned plant, Honda confirmed in August thanks to contracts it has secured and the advanced technologies the launch of an $800 million plant in Celaya, Guanajuato. The it uses, Hermosillo says. plant will build an estimated 200,000 fuel-efficient subcompact Nemak posted total sales of $941 million in the second vehicles per year once it starts operations in 2014. Honda hopes that the second plant will boost the company’s quarter of this year, up $211 million on the same quarter in 2010. “This is Nemak’s second highest quarter in its history,” capital investment in its North America operations to nearly Álvaro Fernández, Alfa CEO, told US$21 billion, with $77 million in investors during a conference. Mexico alone. The new plant reflects Mexican Auto Exports (Units) While the US market declined Honda’s growing market share in Sales to LatAm grow 15% following the Japanese tsunami Mexico under which domestic sales Country 2010 2011 Variable % in March, Nemak escaped relatively grew 10% between 2009 and 2010. unscathed from the supply shortage. Taking a more cautious approach, US 94,149 117,194 24.5 Fernández confirmed that the despite a 6.71% growth in sales in Canada 7,673 14,748 92.2 majority of its supply contracts are the first half of 2011, Toyota has Latin America 20,990 22,937 9.3 with US, rather than Japanese, no immediate plans for expansion. car manufacturers that sold more Velasco says that Toyota is waiting Africa 843 324 -61.6 year-over-year. for the recovery of pre-tsunami Asia 2,169 2,342 8 Confidence in the parts production levels in its existing plant manufacturer is shared by ratings in Baja California. However, “we have Europe 15,483 18,552 19.8 agency Fitch which upgraded the plans to expand production and the Other 2,214 1,746 -21.1 company in May to BBB from BB+, company has Mexico in its sights due Total 143,521 177,843 23.9 due to increased sales, record Ebitda to its strategic location,” he adds. Source: AMIA (Mexican Association of the Automotive Industry) levels and a decrease in leverage. Clearing the decks Not content with the Mexican and Meanwhile, the recovery in the auto sector has had a positive US markets, Nemak is eyeing growth in China and across Asia, knock-on effect for peripheral industries. For instance, the future says Hermosillo. The parts company has a plant in China but is looking brighter for parts manufacturer Nemak, a subsidiary of despite achieving a “pretty successful entrance into the market Mexican conglomerate Alfa, after going through a restructuring their presence is pretty small given Alfa’s size and the heft of the in the wake of the global financial crisis. Chinese market,” he adds. “Growth in the industry is having a big, positive impact on Hermosillo predicts the largest percentage growth over the the parts manufacturers,” says Carlos Hermosillo, an analyst at next two years will come from China, “although the amount Banorte-Ixe. of business they are doing in the US and Mexico is not exactly In August, Nemak closed an upsized $1.145 billion dualnegligible.” tranche loan after luring some 21 banks into the transaction. The loan was part of a refinancing of restructured debt that will allow Continued growth? the company to free up collateral, lower funding costs and loosen The Mexican car industry looks set to continue its growth covenants as it prepares for more growth in the car sector. throughout 2011 and 2012 but with analysts reversing global The deal was initially launched in early July as a $1 billion growth forecasts downward in August, such expectations may five-year amortizing term loan via leads BBVA, Citi, HSBC and quickly come to an end. Santander, but saw the addition of a $145 million revolver Still, analysts see some technical reason for continued that was for working capital and provided Nemak with some optimism. The lack of parts following the Japanese tsunami and operating flexibility without increasing leverage. the extended down period after the economic crisis in 2008 The five-year amortizer is tied to a leverage grid and out of “translate into sufficiently pent up demand to drive production in the box pays Libor plus 300 basis points for over three times, and the latter half of the year and in 2012,” says Swiecki. LF

80 LatinFinance

September/October 2011

Latin Finance - September/October 2011

Table of Contents for the Digital Edition of Latin Finance - September/October 2011