The Long and Short
Tariff uncertainty keep pressure on Nemak bonds
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Nemak debt has been under pressure since the tariff furor began given the possibility of supply chain disruption, volume loss and margin depletion if the US administration follows through on threats to penalize Mexican sourced content. As the discussions have evolved, the auto industry in Mexico should be shielded by relative importance of the sector to US manufacturing as well as the existing architecture that the industry employs under the USMCA. To that end, there is good relative value in Nemak’s split-rated debt when compared to other Mexican corporate debt like Cemex or against Latam ‘BB’ debt, in general.
Nemak’s relationships as an automotive original equipment manufacturer provide meaningful protection against tariff pressure. That follows from its approach to product pricing and particularly its strong competitive position with its main customers, where it’s the sole supplier for 90% of its products. Volumes may nonetheless be impacted as OEMs respond to the changing trade landscape. Nemak, headquartered in Mexico, has six of its forty plants in the US and seems likely to grow it’s US-based capacity as an initial reaction to any incremental tariffs that materialize. So far, however, the company is not seeing any material shift by customers as the industry awaits clarity from the Trump administration and negotiations continue. Further, Nemak’s product line is USMCA compliant with more than 75% of its content sourced from the three countries. As such, the company maintained it’s 2025 guidance in its first quarter earnings report, for now at least, which already had built in some volume decline for the year. Baked into the guidance also is the expectation that net leverage decreases to near 2.0x before reaching that internal objective in 2026.
For the first quarter, revenues were flat at $1.2 billion while EBITDA increased by 3% year-over-year as 2024 cost cutting initiatives maintained momentum and the credit benefitted from higher demand as customers built inventories in front of trade policy uncertainty. Net debt increased by about $70 million, inching net leverage up 0.1x to 2.5x, Liquidity remains strong with $299 million of cash on the balance sheet as well as $400 million of credit line availability, together facing no material amortizations this year.
After managing the fallout from it’s too aggressive bet on electronic vehicle growth in recent years, Nemak had begun to make progress on deleveraging. Operating initiatives to cut costs helped management increase its EBITDA guidance during 2024, after well signaled sequential quarterly prints and thus Nemak was able to meet its year-end 2.5x net debt/EBITDA target. The 2.4x net debt to EBITDA in 4Q24 evidenced the lowest reported leverage since 4Q23 and was a foundation in our view of the relative value of the Nemak credit versus Mexican corps and general BB-rated credit in Latin America, broadly. Then the tariff drama began!
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