NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Copeinca ASA (Copeinca) and its wholly-owned subsidiary Corporacion Pesquera Inca SAC (COPEINCA) as follows:
Copeinca ASA
--Foreign Currency Issuer Default Rating (IDR) at 'B+'
Corporacion Pesquera Inca SAC (COPEINCA)
--Foreign Currency IDR at 'B+';
--USD250 million senior unsecured notes at 'B+/RR4'
The Rating Outlook is Stable.
Copeinca's ratings reflect the company's solid market position as the second largest producer in the Peruvian fishmeal industry with a 10.7% fishing quota in Peru's northern zone, as well as the company's adequate liquidity and moderate leverage. Copeinca's ratings are constrained by production vulnerability to climatic events, such as 'El Nino' or 'La Nina', which increases cash flow and pricing volatility. The ratings are also constrained by the company's limited product and customer diversification; fishmeal and fish oil represent 100% of the company's sales, and China is the company's main market, representing approximately 40%-50% of total sales. Fitch expects Copeinca to maintain its high dividend payout, which will limit meaningful free cash flow (FCF) generation and deleveraging of Copeinca's balance sheet.
The ratings also incorporate the possible takeover of Copeinca by China Fisheries Group Limited (CFGL) following CFGL's recent unsolicited bid for the company. Fitch believes that a potential full or partial acquisition of Copeinca and its fully owned subsidiary COPEINCA by CFGL (rated 'BB-' with a Stable Outlook by Fitch) would most likely have a neutral to mildly positive impact on the credit quality of Copeinca. In this context, Fitch has considered several potential scenarios in which CFGL successfully acquires anywhere between 50.01% and 100% of Copeinca at a price similar to the one currently offered. Ultimately, the credit impact of any transaction on Copeinca will depend upon the final price, percentage of the shares purchased and financing structure. In most of the likely scenarios, the benefits for Copeinca's business profile would offset an increased debt burden.
The 'B+/RR4' rating of the company's unsecured public debt reflects average recovery prospects in the range of 31%-50% of current principal and related interest in the event of default. Fitch uses soft caps on its recoveries in certain markets to reflect concern about creditor rights or weak enforcement of existing laws. This resulted in a cap of Copeinca's debt at the level of 'RR4', which is consistent with anticipated recoveries.
COPEINCA is a wholly owned subsidiary of Copeinca ASA, which has fully and unconditionally guaranteed the notes. Its ratings have been linked to Copeinca ASA's through Fitch's parent-subsidiary linkage criteria. The linkage reflects the strong legal and operational ties between Copeinca ASA and COPEINCA, centralized treasury and management commonality.
Key Rating Drivers:
Factors that could result in a negative rating action include deterioration in Copeinca's credit metrics resulting from some combination of the following elements: adverse climatic conditions and/or declining fishmeal and fish oil prices leading to increased financial leverage and a weak cash position. Debt and leverage increases above Fitch's expectations that may result from a successful but higher CFGL bid may also lead to a negative rating action.
Factors that could trigger a positive rating action include significant reduction in leverage levels on a sustained basis, consistent positive FCF generation, strengthening of the company's contingency cash reserves and/or product diversification.
Financial Performance:
Copeinca is expected to deliver satisfactory results in FY 2013. Fishing conditions in Peru are expected to recover moderately beginning with the first fishing season of the year (May). This should help offset the expected weaker results in the first quarter, the result of weak volumes that carried over from 2012's second fishing season into January of this year. In 2013, sales are expected to be in the USD250 million range, slightly lower than in 2012. After the spike-up in the first quarter of 2013, total debt to EBITDA is expected to return to 3.0x by the end of 2013.
In 2012, Copeinca generated relatively strong sales of USD314 million and EBITDA of USD95.9 million despite poor climatic conditions throughout the year. The fishing quota for the second fishing season of 2012 was reduced to 810,000 metric tonnes (MT) from the prior year's 2,500,000 MT (down 68% year-over-year). Copeinca's financial performance benefited from its high inventory level carried over from 2011. Fitch estimates that adjusted for those inventories, sales and EBITDA would have been USD225 million and USD65 million in 2012, respectively, and debt to adjusted EBITDA would have been 3.4x. Additionally, the 48% reduction in Copeinca's total fishing volumes was partially offset by increases in fish meal and fish oil prices. Copeinca's average fishmeal/fish oil sales price climbed to USD1,548 in the last quarter of 2012 from USD1,270 per MT in the same quarter of 2011. Fishmeal is reportedly currently trading at above USD2,000 per MT. Prices are expected to remain high until the next fishing season, which starts in the second quarter of 2013.
Capital Structure:
In January 2013, Copeinca issued USD75 million of additional debt through the reopening of its 9% senior unsecured notes due 2017. Approximately USD35 million of the proceeds was used to repay leases while the remaining funds will be used for general corporate purposes. Pro forma the transaction, Copeinca's ratio of total debt-to-EBITDA was 2.8x at the end of December 2012. As of Dec. 31, 2012, the company's total debt/EBITDA ratio was 2.3x, a slight decline from the levels of 2.6x and 2.9x reached at the end of 2011 and 2010, respectively, as EBITDA grew faster than nominal debt. At the end of 2012, Copeinca's total debt was USD223.8 million, USD42 million lower than at the end of 2011. The company's debt was primarily composed of USD175 million of unsecured bonds due in 2017, and the rest was lease-back contracts. As of Dec 31, 2012, the company did not have any working capital lines outstanding.
Liquidity:
Copeinca's ratings factor in its manageable liquidity position and debt payment schedule. As of Dec. 31, 2012, Copeinca had short-term debt of USD21.9 million and a cash position of USD15.7 million, with inventories and accounts receivable of USD19.7 million and USD28.9 million, respectively. In addition, the company secured a committed credit line of USD15 million at the beginning of 2013. Fitch estimates that through the re-tap offering, all short-term maturities of long-term debt through 2014 would be addressed. Copeinca's semi-annual fixed expenses are estimated to be about USD25 million. The company also maintains adequate levels of unencumbered assets - primarily fishing licenses - that could be used as collateral to access liquidity if required which provides the company with additional financial flexibility.
China Fisheries Bid:
Copeinca could potentially benefit from becoming part of a larger, more diversified entity with global operations if acquired by CFGL. Synergies from merging with the Peruvian operations are possible as CFGL already owns 6.2% of the Center-North Fishing Quota in Peru through its existing Peruvian operations. A potential combined entity would become the largest fishing company in Peru, holding a combined 16.9% of the quota, followed by the current leader TASA with 14.1% and Diamante with 8.5%.
Fitch believes that if CFGL was to acquire less than a 100% stake in Copeinca, it would lean towards financing the transaction with a larger equity portion. In the potential scenario of a full acquisition, Fitch estimates that the pro forma combined entity would have a total debt-to-EBITDA ratio of 3.3x as of Dec. 31, 2012, about a turn higher than Copeinca's current debt-to-EBITDA ratio of 2.3x as of Dec. 31, 2012. Fitch notes that in the volatile fishing industry, the higher debt ratio would still fall within the upper boundary considered appropriate for the 'B+' rating category. The potential FCF generation and debt repayment capacity of the combined entity would also be considered.
In a scenario where the entire acquisition debt is placed at Copeinca's level, potentially bringing its leverage to at or above 5x, several other factors would be considered, including the strategic importance that a fully owned asset would have for CFGL and the potential benefits and liabilities of merging CFGL's Peruvian operations (2012 EBITDA of USD53 million) into Copeinca. Fitch considers such a scenario possible, but unlikely, and notes that in deciding the final capital structure, CFGL would consider such factors as tax benefits versus cost of financing. CFGL's current Peruvian operations bear only working capital debt, and most of the debt is at the holding company level.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011)
--'Parent and Subsidiary Rating Linkage (Aug. 12, 2011);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Aug. 12, 2011).
Applicable Criteria and Related Research
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773
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