News Column

Fitch Assigns 'BB'/'AA(bra)' Ratings to Tupy; Outlook Stable

June 26, 2014

SAO PAULO--(BUSINESS WIRE)-- Fitch Ratings has assigned long-term foreign and local currency Issuer Default Ratings (IDRs) of 'BB' and a long-term national rating of 'AA(bra)' to Tupy S.A. (Tupy). The Rating Outlook is Stable.

The ratings reflect the sustainable way that Tupy has been increasing its cash flow from operations, with relatively stable margins, combined with a conservative capital structure and healthy liquidity policy. The ratings also factor in the high exposure of Tupy's business to the North American market and to large automakers, as well as the competitive environment, cyclicality and capital intensive characteristics of the automotive industry. The ratings also take into account the company's small scale when compared to the largest auto-parts players worldwide.

The ratings further contemplate Tupy's leading position in the casted engine blocks and cylinder heads markets in the Americas and its increasing geographic diversification during the last years, as well as the strong commercial ties maintained with its major global clients. Despite increasing geographic footprint, Tupy still maintains approximately 68% of its revenues deriving from assets based in Brazil, of which 65% focused on the local market and 35% on the international market through exports. From the total sales in 2013, approximately 33% were destined to the local market, 30% to the US and 18% to Mexico, which were Tupy's main end-markets.

Fitch believes that in the next few years Tupy will continue to preserve conservative leverage, as measured by the net debt/EBITDA ratio below 2.0x. The company's business growth and profitability should remain sufficiently strong to preserve its current credit profile. The Stable Outlook contemplates the absence of relevant debt-financed acquisitions, which could materially impact Tupy's major credit indicators.

Key Rating Drivers

Increasing Cash Generation Sustained by Highly Added Value Products

In the recent years, Tupy has shown satisfactory capacity to increase its cash flow from operations (CFFO). The company's CFFO generation has benefited from a combination of increasing volumes, stable costs and focus on higher added value products. During the last 12 month-period (LTM) ended in March 2014, the company's EBITDA generation was strengthened, reaching BRL493 million, against BRL464 million in 2013 and BRL337 million in 2012. Its EBITDA margin was 15.3% in March (LTM), against an average of 14.4% between 2010 and 2013, presenting limited volatility during this period.

Tupy's CFFO generation has benefited from moderate working capital needs in recent years. As of March (LTM), the company reported CFFO of BRL446 million, positively compared to BRL298 million in 2013 and BRL384 million in 2012. Despite higher investment, BRL230 million, against the BRL197 million in 2013, the company was able to increase its free cash flow generation (FCF) to BRL188 million, from BRL73 million in 2012.

Fitch believes that Tupy's FCF will be moderately pressured in 2014, on the back of high investments in modernization and automation, estimated at BRL250 million. The agency projects positive and increasing FCF which should lead to a gradual and consistent net leverage reduction to levels below 1.0x, from 2016 on.

Conservative Capital Structure

Tupy has historically reported conservative capital structure. The company has prudently managed low leverage, adequate balance between short and long-term funds and relatively lengthened debt amortization profile. In March 2014 (LTM), the company recorded net leverage of 1.3x, below the 1.5x in 2013 and the average of 1.8x between 2010 and 2013. Fitch projections map to the maintenance of low net leverage with a gradual and consistent reduction to levels below 1.0x from 2016 on, benefited from the expectation of positive and increasing FCF during this period.

Debt structure is compatible with the company's business profile and cash generation. At the end of March 2014, Tupy reported total debt of BRL1.8 billion, which included BRL10 million in tax financing as part of Fitch's methodology. Approximately 85% of the total adjusted debt was tied to export financing, while the remainder corresponded to low financial cost loans contracted with the Brazilian Development Bank (BNDES) and tax financing. In the same period, approximately 84% of debt maturities were long-term. Total debts maturing until 2017 amounted to BRL1.7 billion.

Robust Liquidity Supports Industry Volatilities

Tupy's liquidity is robust. The company has a well-defined strategy to keep hefty cash position over its short-term debt obligations, prudently managing the exposure of its cash generation to the volatility inherent to the cyclical automotive industry and to the fluctuations of raw material costs characteristic of this sector. The company's cash reserves totaled BRL1.1 billion as of March 31, 2014. Short-term debt coverage indicators were robust when measured by cash/short-term debt, of 3.0x, and cash plus CFFO/short-term debt, of 5.5x. Such indicators compare to 5.1x and 6.4x in 2013 and 1.2x and 1.9x in 2012, respectively.

Higher Diversification Stemming from Acquisitions

During the last years, Tupy has demonstrated good capacity to reduce its exposure to local market, which growth perspectives for the next years remains under pressure. The company accelerated its internationalization in the end of 2012, when it acquired major operations in Mexico and consolidated itself as an exporting platform to the Nafta market, which encompasses the North-American, Mexican and Canadian markets. On top of the larger geographic diversification, these acquisitions resulted in a leaner cost structure, thus contributing for the company's margins expansion.

Fitch believes that Tupy will continue to pursue higher geographic diversification and scale gains in the next few years, with the aim of strengthening its presence in the global casted engine blocks and cylinder heads markets. Despite Tupy's acquisitive track record, Fitch does not expect the company to make relevant acquisitions exclusively financed with debt which could materially change its main credit indicators.

Strong Competitive Position Despite the Low Operating Scale

Tupy is currently one of the main global suppliers of casted engine blocks and cylinder heads. The company has a market participation of 43% in Americas and 24% in the Western Hemisphere. Despite the strong competitive position in its main operating sector, the company has small to medium scale within the sector. With net revenues of some BRL3.2 billion in March 2014 (LTM) and moderate geographic footprint, considering its high exposure to the American continent, Tupy has as its main challenge to compete with larger companies with higher geographic reach worldwide.

The company also has high revenue concentration in a few strategic clients, including large global OEMs (Original Equipment Manufacturers), through which it has being able to leverage its revenues in recent years due to the supply of multiple products categories in different regions. As the global supply needs of these OEMs become more complex and migrate to other regions, Tupy will have the challenge to keep its competitive position in the sector without damage its cost structure and margins.

Rating Sensitivities

Although not expected in the short to medium term, positive rating actions should occur if case Tupy strengthens its FCF generation, resulting in net adjusted debt/EBITDA ratio below 1.0x on a sustainable basis, with the maintenance of robust liquidity. An increase in Tupy's scale, combined with higher geographic and product diversification will also be positive, in Fitch's view.

Negative rating actions could occur in case of a relevant deterioration in Tupy's FCF generation, resulting in a deterioration of its main credit indicators, with adjusted net debt/EBITDA ratio above 2.5x, without expectation of improvement, and cash/short-term debt below 1.5x.

Additional information available at 'www.fitchratings.com' or 'www.fitchratings.com.br'.

Methodology Applied and Related Research:

--'Corporate Rating Methodoloty - Including Short-Term Ratings and Links Between Holding and Subsidiaries' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=836806

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Renato Donatti

Associate Director

+ 55-11-4504-2215

Fitch Ratings Brasil Ltda.

Alameda Santos, 700, 7th floor

Cerqueira Cesar,

Sao Paulo - SP - CEP: 01418-100

or

Secondary Analyst

Alexandre Garcia

Associate Analyst

+ 55-11-4504-2616

or

Committee Chairperson

Ricardo Carvalho

Senior Director

+55-21-4503-2627

or

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

Source: Fitch Ratings


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