Grupo Antolin Downgraded To 'B-' On COVID-19 Impact; Outlook Negative

  • Major auto original equipment manufacturers have closed plants across Europe and the U.S. in response to fading demand following the outbreak of COVID-19, which will negatively affect Grupo Antolin Irausa SA's (Group Antolin's) operating results in 2020.
  • We expect the Group Antolin's S&P Global Ratings-adjusted debt to EBITDA will exceed 6.5x in 2020 as a result of weaker earnings in first-half 2020, and the uncertainty surrounding the full impact of the COVID-19 pandemic.
  • We are therefore lowering to 'B-' from 'B' our ratings on Grupo Antolin and its debt.
  • The negative outlook reflects our view the COVID-19 pandemic could put further pressure on the group's performance and its ability to meet its maintenance covenants in 2020.
PARIS (S&P Global Ratings) March 26, 2020--S&P Global Ratings today took the rating actions listed above.
Falling demand following the outbreak of COVID-19 has led major auto original equipment manufacturers to close their plants across Europe and the U.S., which we expect will cause significant damage to Grupo Antolin Irausa SA's operating results in 2020.   We now forecast Grupo Antolin's sales in 2020 will decline by 14%-17% and its S&P Global Ratings-adjusted debt to EBITDA will increase to above 6.5x, from an estimated 5.0x-5.5x in 2019. This is in spite of the company's countermeasures to compress costs and investments. In Europe, where Grupo Antolin derives about 50% of its sales, we expect GDP will decline by 0.5%-1.0% in 2020. Given our expectation of further social-distancing measures related to the pandemic, and a progressive shutdown of commercial activities throughout Europe in an effort to curb the virus' spread, we believe light vehicle sales are likely to decline by 15%-20% this year. We expect only a limited recovery in 2021, with anticipated sales of about 19 million units (from 20.7 million in 2019). In the U.S., where the company generates about 39% of its sales, revised GDP forecasts indicate marginally negative growth in first-quarter 2020, followed by a more significant decline in the second quarter. Recovery should begin in the second half of the year. Considering falling consumer sentiment, stock market declines, declining oil market-related demand, a liquidity crunch, and higher-than-expected unemployment claims, we forecast vehicle sales in 2020 will fall by 15%-20%, the same as in Europe. We forecast a low double-digit recovery in 2021, before the market settles at about 16 million units in 2022.
The severity of the fall in auto production in second-quarter 2020 could lead to tight headroom under financial covenants for the rest of 2020.  Grupo Antolin's senior facility agreement contains financial maintenance covenants stipulating reported EBITDA to net financial expenses of more than 4x, and reported net debt to EBITDA of less than 3.5x. At the end of September 2019, the company's net leverage ratio stood at 2.65x, providing comfortable headroom under the covenant. However, we believe that the headroom under the net leverage ratio could tighten, particularly in second-quarter 2020, based on our expectation of a material decline of activity in the next three months.
Grupo Antolin has limited refinancing needs in 2020 and 2021.   At the end of September 2019, Grupo Antolin had cash balances of €232 million and an undrawn €200 million revolving credit facility maturing in June 2023. The group's flexible cost structure, combined with material restructuring measures implemented over 2019, leads us to believe the company's sources of liquidity will cover its needs over the next twelve months. In addition, Grupo Antolin has only limited debt maturities of €49 million coming due in 2020 (of which €25 million is credit lines in China) and €31 million in 2021.
The negative outlook reflects our view that uncertainty surrounding the full impact of the COVID-19 pandemic could put further pressure on the group's 2020 performance, resulting in weak credit metrics, and its ability to meet its financial maintenance covenants.
We could lower the rating over the next 12 months if the economic impact of the COVID-19 pandemic is more significant than we currently expect, and leads to a more severe cut in auto production volumes. This would result in lower EBITDA and cash flow generation, turn free operating cash flow (FOCF) negative, and constrain liquidity, such that the group's capital structure becomes unsustainable in the medium term.

We could revise the outlook to stable if global auto production levels normalize in second-half 2020, and Grupo Antolin restores comfortable headroom under its covenants. We could raise our ratings on Grupo Antolin if its funds from operations to debt increases to above 12% and its debt to EBITDA decreases to below 5x, and FOCF generation is materially positive.
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