Fitch Ratings has affirmed German-based manufacturer
The Outlook on the IDR is Stable.
The ratings affirmation and Stable Outlook reflect the company's improving leverage and profitability metrics. Fitch expects KME's EBITDA leverage ratio to be within rating sensitivities, despite the expected economic slowdown in
KME's IDR is constrained by the volatility of copper product manufacturing, and, in effect, by KME's dependence on copper prices, its weak profitability and cash flow generation relative to peers, reflecting KME's position in the value chain.
Key Rating Drivers
Improving Leverage Profile: We forecast EBITDA leverage at about 4.1x in 2022 and 3.4x in 2023 compared with 8x-12x reported in the past, driven by the expected lower debt quantum by nearly
Deleveraging Under New Capital Structure: After redemption of the remaining
Deviations from the expected deleveraging path due to the energy crisis will affect liquidity and the debt service capacity and will likely result in a negative rating action.
Refinancing Process in Progress: We no longer view the refinancing risk for KME's remaining
In the future, the refinancing risk will refer to working capital facilities on which KME heavily depends in daily operations. We view the ongoing access to borrowing base and factoring facilities as critical for the liquidity management.
Improving but Still Low Profitability: KME's Fitch-adjusted EBITDA margin (IFRS-based figure) of 4%-5% over the rating horizon is weak compared with similarly rated peers. Despite a current structural change in margins from the previous 2%-4% on the recent price increases, KME's profitability remains vulnerable to growing energy prices as well as other costs compared with peers, despite its moderate energy expenses (2.8% of sales in
In the absence of the special division with historically better margins than copper and copper alloy products, KME's profitability profile maps a 'b-' midpoint, according to our Diversified Industrials and Capital Goods Ratings Navigator.
Thin FCF Margin: We expect the free cash flow (FCF) margin to turn negative in 2022 due to high working-capital outflows, mainly related to high copper prices and divested businesses. Thereafter, we forecast a recovery to nearly 3% in 2023-2024 as working capital changes stabilize, interest costs decrease on debt amortization and non-recurring costs are limited. We view thin FCF margins as a long-term sustainable characteristic based on KME's low-margin operating environment for a producer of copper and copper alloy products.
Less Diversified Offering: We view KME's product range and geographic diversification as weaker than before the divestments. KME is now focused on rolled copper products and its alloys, following the divestment of special and wire businesses. Revenue will, therefore, be lower in 2022, although it will be partly offset by the accretive revenue on acquisition of
Constrained Business Profile: KME's business profile is constrained by its fairly small scale, concentration on
The business profile is supported by KME's leading market positions in
Derivation Summary
KME's scale is smaller than that of its direct competitor
KME's leverage has been higher than that of similarly rated peers in the diversified industrials and capital goods sector for the past few years. With cash proceeds from the divestment of the special division deployed to debt reduction, EBITDA leverage is lower than industrial belt manufacturer
Key Assumptions
Fitch's Key Assumptions Within Its Rating Case for the Issuer:
Revenue to decline 5% in 2022 on the disposal of the special and wire businesses supported by the acquisition of
EBITDA margin at 4.4% in 2022, increasing to 4.7%-4.9% in 2023-2025
High working capital outflows in 2022, before normalising from 2023
Capex at about 1% for 2022-2025
No dividends paid and received until 2025
Redemption of its
Extension of KME's borrowing-base facility and factoring lines on a regular basis
RECOVERY ASSUMPTIONS
Fitch's bespoke recovery for KME's senior secured debt is based on a liquidation approach
The approach reflects the security package of the senior secured notes and the borrowing-base facility, which contains separate collateral
The recovery analysis is based on the
We apply a discounted market value of KME's property and the net book value of the machinery and equipment related to the property securing the notes
A going-concern EBITDA of
These assumptions result in a recovery rate for the senior secured rating within the 'RR1' range, which enables a three-notch uplift to the debt rating from the IDR
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
EBITDA gross leverage sustainably below 4.0x
FFO margin sustainably above 4%
FCF margin above 2%
Improving diversification
Factors that could, individually or collectively, lead to negative rating action/downgrade:
FFO gross leverage consistently above 7.0x
EBITDA gross leverage consistently above 6.0x
Negative FCF margin leading to diminishing liquidity sources
Lack of progress to refinance 2023 maturities
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Limited Liquidity: Fitch views KME's liquidity profile as limited but adequate for continued operations in the short term. This is based on
We expect a working-capital outflow in 2022, due to high copper prices and divested businesses, before it normalises in 2023-2024. We forecast an FCF margin of nearly 3% in 2023-2024 with a debt service supported by available liquidity sources. We view ongoing access to borrowing base and factoring facilities as critical for the liquidity management. Fitch assumes that KME will have continued access to working-capital facilities based on its regular extension pattern in the past as well as compliance with financial covenants under its borrowing-base facility agreement and factoring programme.
Debt Structure: We expect the redemption of the remaining
Issuer Profile
KME is a producer of semi-finished and finished copper and copper alloy products for use in other products and processes by a wide range of end users and industries. The production facilities are located in
In accordance with Fitch Ratings' policies, the issuer appealed and provided additional information to Fitch Ratings that resulted in a Rating action that is different than the original Rating committee outcome.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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