The BB- rating of the Germany-based automotive supplier MITEC is supported by its strong market position as a small tier 1 supplier in the growth market for balancer systems, as well as by a well-diversified geographical spread and ample order backlog.

Negative rating factors include MITEC’s still relatively small size, with a turnover of EUR 137m in 2013, and its relatively limited product offering, in which 75% of total revenues are derived from the sales of MITEC’s core product, balancer systems.

Driven by cash flows buoyed by the order backlog, Scope expects MITEC to reduce its high ND/EBITDA to 4.5x in 2016 (2013: 8.7x). For the same reason, Scope assumes MITEC’s EBITDA fixed charge cover to improve to 3.3x in 2016 (2013: 1.4x).

KEY RATING DRIVERS

Tier 1 supplier in the balancer systems niche market. MITEC is a tier 1 auto component supplier to major auto manufacturers with an assumed global market share of 10% in the niche market of balancer systems.

Ample order book provides cash flow visibility. The company’s long-term order backlog for 2014-2018 totals EUR 900m, which represents 6.5x MITEC’s 2013 sales. Although it carries some execution risk, the order backlog provides good visibility and stability for MITEC’s future revenues and cash flows. According to Scope’s calculations, even after applying a conservative safety discount of 20% on MITEC’s booked business in a stress case scenario, MITEC’s order backlog is considered sufficient to keep the company’s EBITDA above a level of EUR 10m and to improve MITEC’s ND/EBITDA to 6.1x in 2016 and the EBITDA fixed charge cover to 2.6x.

EBITDA margin to improve. MITEC’s adjusted EBITDA margin declined from 17.5% in 2010 to 6.5% in 2013. This is due to material delays in order deliveries from a core customer and associated high pre-financing costs. With the order backlog materializing, Scope expects MITEC’s EBITDA margin to improve to about 11% in 2016.

Customer diversification bears concentration risks. The company currently shows a strong customer concentration with the largest three customers accounting for a high 84% of 2013 sales. Given the order backlog to 2018, Scope expects this customer concentration to remain high, but, with an increasing bias towards auto manufacturers with weaker financial profiles. The latter is seen as a credit negative.

Solid geographical diversification to improve further. In 2013, 55% of MITEC’s revenues were generated in Europe; 19% through its Chinese joint venture and the remaining 26% in ROW, predominantly with US auto manufacturers. With the help of its American and Chinese subsidiaries, MITEC is expected to reduce its remaining dependence on the European car manufacturing industry through more revenue generated in the US and Asia.

Sufficient liquidity. MITEC’s interest-bearing debt amounted to EUR 101m in June 2014. In addition, MITEC had access to EUR 2m of undrawn committed bank facilities. MITEC’s liquidity profile is considered to be solid. Cash and marketable securities available of EUR 15.7m at FY13 comfortably cover the 2014 debt maturities of EUR 6.5m. Given the order backlog and the company’s expected solid financial performance, Scope believes that any risks arising either from refinancing/prolonging the EUR 45m bank debt facility from MITEC’s house banks by the end of 2016 or from refinancing the EUR 25m corporate bond in March 2017 are limited.

Senior Unsecured Corporate Bond Rating of BB- at the same level as the CICR. The BB- Corporate Bond Rating reflects MITEC’s Corporate Issuer Credit Rating as well as the seniority and asset pledges of MITEC’s debt positions. Given the absence of a security package, MITEC’s Corporate Bond is structurally subordinated to the secured debt issued by MITEC AG and its US-American subsidiary MITEC Powertrain Inc., which amounts to roughly EUR 72m in June 2014.

Outlook
The outlooks for the CICR and bond rating are Stable. A positive rating action on the CICR and the bond rating might occur if on the one hand, the company’s order backlog materializes as expected and the resulting cash flow is used to reduce the high leverage and, on the other, customer diversification improves.

The rating methodology applied is the refined Corporate Rating Methodology which was placed on call for comments on 9 July 2014. This methodology is available on www.scoperatings.com.

About MITEC Automotive AG
Founded in 1990 MITEC Automotive AG is a German auto supplier operating in the field of automobile propulsion technology which aim at the reduction of noise emissions and vibrations, as well as enhancing efficiency within the powertrain. The product portfolio comprises auto parts such as balancer systems, gear wheels and bevel gear sets along with adjustable oil pumps and camshaft timing devices. The company operates production sites in Germany, China and the USA.

 
REGULATORY DISCLOSURES

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings GmbH, Berlin, District Court for Berlin (Charlottenburg) HRB 145472, director: Florian Schoeller.

The rating analysis has been prepared by Sebastian Zank, Lead Analyst
Responsible for approving the rating: Dr. Britta Holt, Committee Chair

Rating history
26.08.2014 BB- outlook Stable

Information on interests and conflicts of interest
The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings GmbH nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings GmbH or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of information for the rating
Prospectus, Website of the rated entity, Valuation reports, other opinions, Annual reports/semi-annual reports of the rated entity, Current performance record, Detailed information provided on request, Annual financial statements, Data provided by external data providers, Interview with the rated entity, External market reports, Press reports and other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the rating by the rated entity prior to publication

The rated entity has been given the opportunity to examine the press release prior to publication. Following that examination, the press release was not modified.

Methodology
The rating methodology applied is the refined Corporate Rating Methodology which was placed on call for comments on 9 July 2014. This methodology is available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.
 
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