In January, Germany-based MITEC Automotive AG (‘MITEC’; CICR: BB-/Stable) announced that 50% of its shares were now owned by Jebsen & Co Ltd (‘Jebsen’), a private automotive-specialised distribution and wholsesale group, through a i) share purchase from MITEC’s founder, Dr Militzer, and ii) participation in a EUR 12m capital increase. In addition, Jebsen – MITEC’s partner in its joint venture, MITEC Jebsen Industrial Holdings Ltd (‘MITEC-Jebsen’) – has transferred its 50% share in MITEC-Jebsen into MITEC, which fully consolidates the Chinese division, MITEC-Jebsen Automotive Systems (Dalian) Co Ltd. Further capital measures include i) a EUR 13m interest-bearing participation certificate granted by Jebsen, ii) the rearrangement of MITEC’s existing club deal facilities of roughly EUR 58m plus another EUR 20m loan tranche, and iii) a EUR 8m subordinated loan granted by bm-t beteiligungsmanagement thüringen gmbh, the investment company of the Free State of Thuringia in Germany.

Scope believes the resulting effects on MITEC’s business risk profile are likely to provide higher visibility on future ventures. Nevertheless, capital measures, such as MITEC-Jebsen’s full contribution, only slightly impact the business risk profile, in Scope’s view. Also, while the full consolidation of the Chinese division underpins solid geographical diversification and expands future cash flows from this strategic market, Scope expects MITEC’s margin profile to improve only slightly given MITEC-Jebsen’s beneficial operating cost profile.

With regards to the financial risk profile, Scope notes that the capital injections strengthen MITEC’s liquidity and slightly improve its net adjusted debt. However, the increase in cash reserves is expected to be largely offset by its growth ambitions: a large-scale expansion of capacity at around EUR 50m, financed primarily with debt. Also, as cash inflows are received 2-3 years after new investments are made, MITEC’s still high leverage is expected to improve only gradually. Nevertheless, Scope believes MITEC’s EBITDAR fixed-charge cover will improve slightly faster and continuously until 2018 due to extra earnings from the fully consolidated MITEC-Jebsen and the advantageous interest environment. Scope notes that MITEC’s improving financial risk profile in terms of leverage and debt protection is in line with Scope’s expectations and is already reflected in the BB- CICR.

Scope further expects no substantial change in the structural subordination of MITEC’s EUR 25m senior unsecured corporate bond, which also has no impact on the bond rating as a result.

A positive rating action would require a faster-than-expected deleveraging with stronger credit metrics, such as an adjusted debt/EBITDAR of below 3.5x and an improved EBITDAR fixed-charge coverage of above 4.0x. An upgrade would also depend on MITEC’s ability to significantly improve its customer diversification, i.e. if the top three customers comprise less than 50% of revenues.

The current ratings could come under pressure if adverse market conditions weaken MITEC’s cash flows and ability to reduce its high leverage to below 5.0x (net debt/EBITDAR) by YE 2016.

This publication does not announce a credit rating action.