MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned the following initial ratings to Grupo Gayosso, S.A. de C.V. (Gayosso):
--Foreign currency Issuer Default Rating (IDR) 'B';
--Local currency IDR 'B';
--USD$150 million senior unsecured notes due 2020 'B/RR4'.
The Rating Outlook is Stable.
The ratings reflect Gayosso's brand equity, geographical diversification, and stable industry prospects. They are constrained by high leverage levels and about MXN$0.7 billion in contractual service obligations. The proposed USD$150 million issuance will be used to pay down existing debt (both senior and subordinated), as well as for general corporate uses and, possibly, acquisitions. 'RR4' rated securities have characteristics consistent with securities historically recovering 31%-50% of current principal and related interest.
Key Rating Factors
Favorable Demographics
Gayosso faces a favorable industry outlook with stable, growing demand. Government estimates predict that the death rate will increase from 0.56% in 2010 to 0.92% in 2050, as Mexico's population today is concentrated in younger age groups. Furthermore, the worldwide trend towards cremation has little effect in Average Revenue per Funeral Call in Mexico, as full wake services are still provided.
Strong Brand Equity
Gayosso's brand name is publicly recognized as one of the oldest death care providers in the country, with strong brand equity in Central Mexico. Gayosso operates in 12 states, located in Northern, Western and Central Mexico. The Central Mexico region, which includes Mexico City and the states of Mexico and Guerrero is the most important region for Gayosso totaling 43% of sales. The states in the Baja California peninsula and Jalisco, comprising the Pacific region, follow in importance with 32% of sales.
Pre-Need Sales and Collections Drives Cash Flow
Short-to-medium term cash flow depends on the company's ability to generate pre-need sales with good collectability, as well as at-need sales. For year-end 2012, pre-need sales were 70% of total sales and 67% of total cash inflows. Unlike similar businesses in other countries, Gayosso recognizes 90% of pre-need sales at the signing of the service contract, and has full access to cash flows as they come in, instead of at the time of death. Thus, unlike U.S. death care providers, there is no backlog of future cash flows. This allows for higher PV of cash flows but reduces long-term cash flow predictability and stability when compared to U.S. peers.
In 2012, cash from operations (CFO) was MXN$86m, and subtracting capex of MXN$48 million, free cash flow was MXN$38 million for the year. Since Advent acquired the company in 2007, net equity injections have totaled MXN$498 million, which have supported the company and its growth. During 2011, Gayosso experienced cash flow volatility due to collection issues. Fitch will consider as positive to credit quality a track record of stable cash flow generation going forward.
Contractual Liabilities
Related to death care contractual obligations, they represent about MXN$ 675 million, representing about 0.5 million fully-paid and not yet redeemed pre-need contracts. The company offers upgrade plans to pre-need customers at the time of redemption, which helps fund these obligations as cash outlays come up.
The company has shown weak credit metrics over the medium term. As of Dec. 31, 2012, debt to pre-interest-expense CFO and CFO interest coverage were 6.7x and 1.5x, respectively. Fitch expects debt to pre-interest-expense CFO to be around 7.5-8.5x levels in the near future, pro forma the proposed debt issuance. Proceeds from the issuance will be used to refinance existing indebtedness and the remainder cash balances will be used to pursue growth opportunities while providing financial flexibility in the meantime. The company has not paid dividends in the near past, and Fitch would take a dim view of dividend payments at these leverage levels.
Rating Sensitivity
Factors that could diminish creditworthiness would include a drop in sales, an increase in uncollectable accounts, a reduction in the percentage of upgraded pre-need plans at the time of redemption, an inability to control SG&A expenses, payment of dividends at current leverage levels, as well as higher leverage ratios.
Factors that could improve credit quality include lower leverage, higher interest coverage, stronger and/or stable cash flow generation, free cash flow generation (CFO minus capex minus dividends), and improvements in the funded status of contractual service obligations.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research
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
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=788980
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