Tashkent, Uzbekistan (UzDaily.com) -- Fitch Ratings has assigned Uzbekistan-based JSC UzAuto Motors (UAM) a Long-Term Issuer Default Rating (IDR) of ‘B+’ with Stable Outlook.

Strong Links with State: Fitch views the status, ownership and control linkage of UAM with the state as ‘Strong’ because there is full state ownership and operational control by the parent over the company’s capex and operational strategy. We assess the support track record as ‘Strong’ due to the established state support in the form of shareholder loans on favourable terms; the absence of large dividends paid to the parent, which we expect to continue at least until the end of the planned large capex programme; and the favourable regulatory environment supported by high import duties for cars, protecting the company’s dominant position in its domestic market.

Support Incentive in Place: We view the socio-political implications of a UAM default as ‘Moderate’. The company uses a long-term licence agreement with General Motors Company (GM; BBB-/Stable), and there might be alternative offers from foreign competitors in case of issues at UAM, although this could cause temporary disruption. We assess the financial implications of a UAM default as ‘Moderate’ as we believe it would have a moderate impact on the availability of financing for the government and other Government-Related Entities (GREs).

Constrained SCP: We assess UAM ‘s Standalone Credit Profile at ‘b’. This reflects the company’s business profile, which is weaker than that of other Fitch-rated carmakers, with limited scale, narrow product range and sales concentrated in Uzbekistan. The company’s business profile is also constrained by the absence of a strong brand, limiting the company’s competitive position in relation to global auto manufacturers. UAM’s operating activity is fully dependent on the existing long-term licence agreement with GM which provides access to GM’s technology and know-how. Improvements in these business characteristics could lead to a higher SCP.

Limited Geographical Diversification: UAM is primarily focused on Uzbekistan where automotive sales are extremely volatile. This has been partly offset by significant exports (around 25%-45% of total sales historically). The share of exports declined to about 5% over 2018-2020 but the company is aiming to increase this to about 16% by 2023 mainly through larger sales in Kazakhstan and Russia. This would increase diversification, but is subject to macroeconomic and political risks and could increase earnings volatility due to FX exposure.

FCF Volatility: UAM’s free cash flow (FCF) has been highly volatile since 2016 and is a key rating constraint. Negative FCF margin of about 10% in 2020 was primarily due to our estimates of a material working capital outflow of over USD300 million and capex of about USD100 million. We forecast a negative FCF margin of about 5% in 2021 due to UAM’s ambitious investment plans and then an improvement to about 2.5% in 2022 due to lower capex.

Temporary Rise in Leverage: We expect funds from operations (FFO) leverage to increase to about 2.5x-3.0x in 2021-2022 from about 1.5x expected at end-2020 due to significant capex to be primarily debt-funded. Our base case includes off-balance sheet debt of about USD170 million to be issued in 2021 by related company UzAuto Motors Powertrain, with a cross-guarantee between two entities. The completion of the investment phase should bolster FFO generation and we expect the company will prioritise deleveraging. We forecast that FFO gross and net leverage should reach more moderate levels of about 2.5x and 1.5x by 2023, respectively.

Moderate Impact of Covid-19: In contrast to other global carmakers, UAM’s earnings were less affected by the pandemic in 2020. The company’s sales volume in 2020 increased by 5% yoy although revenue deteriorated by single-digits in USD terms amid local currency devaluation.

Dominating Position: The company is the main producer of passenger cars in Uzbekistan and has a dominant position in the country. This combined with high capex in production facilities and favourable regulation, all act as significant barriers to entry and support local market share.

Nevertheless, the planned liberalisation of Uzbekistan’s economy could increase competition from foreign players and erode UAM’s sales and profitability.

FX Exposure: The company is exposed to material FX risk as the majority of its sales are generated in local currency, while about 60% of its operating costs are linked to foreign currencies, mainly to USD.

Furthermore, to finance its capex programme the company plans to issue debt denominated in USD. The company does not hedge its FX exposure but plans to do so in the future. Fitch forecasts further Som devaluation against hard currencies in 2020-2022 and this could affect UAM’s leverage metrics. However, UAM could offset some of the FX impact by increasing its prices.

The company’s business profile is considered weaker than that of other global automotive manufacturers including GM, Ford Motor Company (BB+/Negative), Renault SA (BB/Negative) and Jaguar Land Rover Automotive plc (JLR; B/Negative). The company is not fully comparable with Fitch rated peers as it does not own the brands of the models it manufactures and the associated technological expertise. Moreover, despite its dominant position in its domestic market UAM’s scale is much smaller than peers’. The company’s product and geographical diversification is also significantly lower than those of global automotive manufacturers.

The company’s financial profile is characterised by highly volatile cash flow generation compared with other globally rated peers. We forecast UAM’s FFO margin will be in the range of 6%-7% in 2021-2023, in line with GM and Renault, but lower than Stellantis N.V. (BBB-/Stable) and JLR (about 10% on average over 2017-2019). The company’s FCF volatility is much higher than peers’.

Projected gross leverage is comparable to Ford’s, GM’s and JLR’s, but higher than Stellantis’s. Global auto manufacturers usually maintain a net cash position or net leverage metrics below 1x, comparing favourably to UAM.

Weak Liquidity: At end-2020 the company had readily available cash of about USD29 million based on preliminary data, which was not sufficient to cover expected negative FCF in 2021. In November 2020 the company issued a bridge loan from Credit Suisse with a total limit of EUR150 million due in 2021, which supports the tight liquidity position.

We expect UAM’s liquidity position to improve following the planned Eurobond issue of about USD300 million and other financing of up to USD70 million which will be used to finance its large capex programme and will strengthen its debt maturity profile.