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Rating agency CRISIL has downgraded rating on Apollo Tyres Ltd’s debt from “AA” to “A” as fully debt funded acquisition of US-based Cooper Tires will hit the financial profile of Indian tyre company.
It also revised rating outlook to ’Negative’ from ‘Stable’ and also downgraded the company’s short-term rating to ‘CRISIL A1’ from ‘CRISIL A1+’.
The rating downgrade follows Apollo’s announcement to acquire Cooper Tire and Rubber Ltd in an all-cash-transaction of USD 2.5 billion.
The transaction will be funded entirely through foreign currency debt through two international subsidiaries. The fully debt-funded acquisition, which is much larger than Apollo’s existing consolidated balance sheet, will deteriorate its financial risk profile, it said.
Apollo [Mauritius] Holdings will contract $450 million of debt whereas Apollo Vredestein BV (Vredestein) will raise $ 2,100 million through USD denominated bonds. Bonds will have a maturity of 7 to 8 years and redemption will be back ended.
The debt of $ 450 million will be serviced by Apollo’s India operations and the remaining debt will be serviced jointly by Vredestein and Cooper.
The combined entity will derive significant synergy through raw material sourcing and economies of scale and scope. But, the benefits of synergies will take at least two to three years to manifest.
The fully debt-funded acquisition, post-acquisition the consolidated entity will have a net gearing of around four times. The entity’s debt protection metrics are also likely to weaken significantly from current levels.
While elaborating on revising outlook, CRISIL said the susceptibility of Apollo’s debt servicing ability to the cyclical nature of the tyre industry and volatility in raw material prices is magnified post this acquisition.
Also, Apollo could face issues with integrating the combined entity and exploiting the benefits of synergies in initial years.
With interest servicing burden on the newly contracted acquisition debt of USD 450 million, the interest coverage ratio for Apollo’s India operations will decline to around 2 times, whereas for the Vredestein and Cooper (combined) the ratio will be at around 3 times. Historically, Apollo’s interest coverage has been in the range of 4 to 5 times.
Apollo will get access to the high growth market of China and also a sizable presence in the largest global tyre market of North America.
The ratings continue to reflect Apollo Tyres’ strong market position in the Indian tyre industry, diversified revenue profile emanating from presence across geographies, products/brands and consumer categories. These rating strengths are partially offset by the company’s exposure to a cyclical industry and volatile raw material prices, CRISIL added.
