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Nissan-to-Honda Plant Openings a Boon for Nemak: Mexico Credit

November 03, 2013

Mexico’s biggest auto-parts maker is rewarding bondholders with triple the returns of its emerging-market competitors as three Japanese automakers open factories in the country and U.S. auto sales jump.

Tenedora Nemak SA, the world’s largest independent maker of aluminum engine heads and blocks, has returned 4.2 percent over the past month, versus 1.4 percent for bonds issued by emerging-market companies in the auto industry, according to data compiled by Bloomberg. Yields on Nemak’s $500 million in 2023 dollar bonds fell 0.6 percentage point in October to 5.71 percent, the biggest monthly drop since the securities were issued in February, as Standard & Poor’s boosted the company’s rating by two steps to BB+, the highest junk-grade level.

The company, a unit of the conglomerate Alfa SAB (ALFAA), is set to profit as foreign automakers expand their production in Mexico, according to Rafael Elias, a debt analyst at Credit Agricole. Nissan (7201) Motor Co., Mazda Motor Corp., Honda Motor Co. and Volkswagen AG’s Audi unit are building new plants in Mexico, which an industry group projects will help increase the country’s auto output by almost 40 percent in the next four years from their 2012 level.

“You’ve got a tailwind,” Carlos Legaspy, who oversees about $350 million in emerging-market debt at Insight Securities Inc., including Nemak debt, said in a telephone interview from Riverwoods, Illinois. “It’s continuing credit improvement.”

Nemak Sales

Nemak’s sales climbed 14 percent to $3.29 billion during the first nine months of the year, Alfa said in a press release on Oct. 21.

Earnings before interest, taxes, depreciation and amortization, a profit measure known as Ebitda, may climb 19 percent this year to a record $600 million, according to a transcript of an Oct. 22 Alfa conference call with analysts and investors. That compares with the company’s estimate in February of $565 million. San Pedro Garza Garcia-based Alfa also makes polyester and packaged ham.

The company’s auto parts unit “continues to take advantage of the recovery in the North American region,” Alfa Chief Financial Officer Ramon Leal said in a conference call with analysts and investors Oct. 22.

Auto sales in the U.S., which buys about 67 percent of Mexico’s car and light truck exports, are on track for their best year since 2007. U.S. auto sales rose to an annualized pace of 15.2 million in October compared with 14.4 million a year earlier, according to researcher Autodata Corp.

Enrique Flores, a spokesman for Alfa, declined to comment on Nemak’s performance in the bond market.

October Upgrade

On Oct. 3, Standard & Poor’s upgraded Nemak two levels to BB+, citing its “strong operating performance” and successful integration of its latest acquisition. Alfa bought Sheboygan, Wisconsin-based J.L. French Automotive Castings Inc. for $215 million last year.

Nemak will continue to boost production volumes due to new agreements with its largest clients, Ford Motor Co. (F:US), General Motors Co. (GM:US) and Chrysler Group LLC, the ratings company said. Supplier deals with Nissan, Volkswagen and Bayerische Motoren Werke AG (BMW) will also provide a lift, S&P said.

The Alfa unit may win additional ratings upgrades from S&P as the Mexican auto-parts industry continues to expand, Credit Agricole’s Elias wrote Oct. 22 in a note to clients. Nemak’s net debt was 2.2 times the past 12 months’ Ebitda as of Sept. 30, down from 2.7 times a year earlier.

The price of the bonds has climbed to 98 cents on the dollar, after falling as low as 92 cents in June amid a selloff in emerging-market assets. It’s still below the issue price of 100 cents on the dollar.

“Current bond prices and yields look quite attractive, particularly since its credit metrics are increasingly looking more like investment grade,” Elias wrote. “With bonds trading at a dollar value below par, I believe there is more upside in these bonds.”

To contact the reporters on this story: Brendan Case in Mexico City at; Ben Bain in Mexico City at

To contact the editors responsible for this story: David Papadopoulos at; Michael Tsang at

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