NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following ratings to San Miguel Industrias PET S.A. (SMI):
--Foreign currency Issuer Default Rating (IDR) 'BB';
--Proposed senior unsecured guaranteed notes 'BB'.
The proposed issuance will be up to USD200 million. Proceeds from the proposed issuance will be used primarily to refinance the company's existing bridge facility and for general corporate purposes.
The Rating Outlook is Stable.
KEY RATING DRIVERS:
LEADING POSITION IN PERU:
SMI is the leading manufacturer and distributor of PET preforms and bottles in Peru with a market share of about 70%. The group's performance is driven by the growing middle class and soft drink consumption in Peru. Competition risk is mitigated by barriers to entry. The company generates about 80% of sales from Peru, including exports. SMI also operates in Ecuador, Panama, El Salvador and Colombia.
CONCENTRATION RISK AND LONG-TERM SUPPLY AGREEMENT:
The group has longstanding contracts with international bottlers such as Lindley and SABMiller. It also sells to B-brands. The top eight customers accounted for approximately 66.9% of the group's 2012 sales by volume. This exposes SMI to concentration risks, notably if these bottlers do not renew their contracts or start to further integrate their own operations vertically (injection and blowing). About 67% of SMI was based on contracted agreements in 2012. SMI has demonstrated its capacity to renew its long-term contracts over the years with its main customers.
HIGH INITIAL LEVERAGE AND DELEVERAGING:
Fitch expects SMI to increase capex over the next two years but project positive free cash flow and therefore a rapid deleveraging. Fitch expects SMI's net leverage to trend to below 3x by fiscal year end (FYE) 2015 from a net debt/EBITDA at about 4x estimated at end-2013 (5x on gross leverage).
SMI is expanding its operations in Colombia with a new injection plant that will start operation in the first quarter of 2014 (1Q'14). Fitch expects that the ramp-up of this plant to positively contribute to the group's profitability from late 2014-2015 onwards.
Pro forma the bond transaction, most of the debt will be represented by the bond issuance. There are no material debt maturities before the maturity of the bond. Post issuance of the bond, the group's debt will be at USD208.5 million for a latest 12 months (LTM) EBITDA of around USD42.5 million (at end-June 2013) and a cash balance of about USD36.5 million.
STABLE PROFITABILITY:
SMI has been able to maintain steady EBITDA margin at about 18%-20% because of its operating model based on highly contracted revenues, its pass-through model that gives margin protection against price volatility of the resin and the natural hedges against currency fluctuation (equipment and client contracts are in USD). However, the company is not fully immune to a rapid rise in resin price due to delays to pass on the actual price increases to its customers. Resin represents 80.9% of total costs and SMI's resin purchases are concentrated with two main providers.
The group owns one of the few recycling 'bottle-to-bottle' PET resin plants in Latin America, and the only one in Peru after having made an initial investment of USD15 million. Fitch sees the recycling activity as a positive factor for the group's profitability in the future and a way for the company to strengthen its product offering by manufacturing preforms and bottles with recycled resin. However, the company still needs to get the approval from the Peruvian authorities in order to further develop this activity.
CORPORATE GOVERNANCE:
SMI is a private company fully owned by Nexus Group SA. Fitch factors in its rating positive support from the shareholder who recently injected USD22 million via a capital injection. Fitch understands that the group's financial policy is to operate under a target gross debt/EBITDA below 3x with an incurrence debt covenant at 3.5x and then maintain a dividend payout at a maximum level of 50% of annual net income. Management indicated that the company will not pay dividend over the next two or three years.
RATING SENSITIVITIES:
A positive rating action could result from some combination of the following factors: a sustained strengthening of the company's adjusted gross leverage, improve geographical and client diversification while sustaining an EBITDA margin above 20%.
A negative rating action could be triggered by the group not deleveraging rapidly in the next 18 months, as sharp contraction of group's EBITDA margin and the company not generating positive free cash flow.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
National Ratings Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=595885
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=805779
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