MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a foreign currency and local currency Issuer Default Rating (IDR) of 'BB-' to Ingenio Magdalena S.A. (Imsa). The Rating Outlook is Stable. Fitch has also assigned a 'BB-(exp)' rating to Imsa's proposed senior unsecured notes up to USD400 million with a maturity between 5 to 10 years. The proceeds from the debt issuance will be used to refinance existing debt and for general corporate purposes. The proposed notes will have the guarantee of certain Imsa's subsidiaries that represent approximately 94% of total assets and close to 100% of consolidated EBITDA.
KEY RATING DRIVERS
Imsa's ratings are supported by the company's solid business position as the largest sugar mill and producer in Guatemala and a leading player in the exports of refined sugar in Latin America, diversified operations through the production of sugar and alcohol and generation of power and energy, and good operating margins coming from its low cost structure that benefits from its strategic location near the sugar cane fields and ports, and self-sufficient energy requirements. The ratings also benefit from the company's track record of continuous growth of its operating performance through the cycle, with moderate credit metrics and adequate liquidity.
The ratings of Imsa are constrained by the volatility of the sugar industry which is exposed to fluctuations in commodity prices, climate changes and seasonality of its operations. Concentration of its operations in one location, as well as its expected increase in financial leverage and negative free cash flow generation associated to higher capital expenditures (capex) in its power and energy business segment also limits the ratings.
SOLID POSITION
Imsa's ratings are supported by the company's leading positions in the segments where it operates. The company is the leading exporter of sugar in Guatemala and refined sugar to Latin America, while in Guatemala has an approximately 24% of market share in sugarcane crushing. In the last harvest period Imsa crushed 6.4 millions tons of sugarcane. Imsa's biomass based electricity production represented 31% of the total electricity produced by the sugar industry and around 4% of the total electricity produced in Guatemala. The company's installed capacity is 175MW. Its alcohol business has the largest hydrous alcohol distillery in the country with a daily production of 420 thousand liters.
DIVERSIFYING INTO POWER GENERATION
Fitch views as positive Imsa's business strategy oriented to increasing the operations of its power and energy business, which is less volatile than its sugar operations and will provide cash flow stability. In the medium to long term, operating cash flow generation should be balanced between the sugar and power operations. Fitch believes that Imsa's diversified portfolio of revenues lowers business risk and cash flow volatility. In 2012, the company generated around 73%, 12% and 12% of its total sales from sugar, power and energy, and alcohol, respectively; while EBITDA generation was mainly supported by sugar, power and energy, and to a lesser extent alcohol.
INDUSTRY CYCLICALITY
The ratings consider the risks associated to the sugar industry which is highly volatile. The profitability margins of Imsa are exposed to the international prices of sugar which are affected by the cyclical imbalances coming from the domestic and international markets resulting from weather conditions, global economic growth, and changes in consumption habits and government imposed trade conditions. In 2012 the company's EBITDA margin as per Fitch calculation was 37% which was lower than 41% at the end of 2011. Lower average sales sugar prices contributed mainly to this deterioration. Fitch expects that the company's EBITDA margin remains pressured in the following 12 to 18 months as sugar prices have been declining during the year. For the last 12 months as of June 30, 2013, EBITDA margin was approximately 22%.
Fitch's expectative incorporates higher leverage in the following 18 to 24 months and gradual decrease starting 2015. Imsa's financial strategy contemplates to refinance its total debt with the proposed USD400 million of senior notes and with USD125 million of a syndicated loan signed in October 2013. Failure to achieve this will pressure liquidity. Total debt calculated by Fitch, which includes capital leases, was USD583 million as of June 30, 2013. On a proforma basis, Fitch incorporates that the company's total debt to EBITDA will be around 3.6x by the end of 2014 and then should gradually deleverage in the mid to long term to levels below 3.0x through higher EBITDA generation and debt reduction. On an adjusted basis, including capital leases and the annual rent expenses of land multiplied by 8 times, Fitch expects for 2014 an adjusted debt to EBITDAR of around 4.4x. Imsa's long term total debt to EBITDA target is between 2.5x and 3.0x.
IMPROVED LIQUIDITY EXPECTATION
Following the refinancing of its current debt the company's debt maturities will be manageable with annual debt amortizations below USD63 million in the following five years. In addition, Imsa's liquidity position has been supported by its generation of funds from operations (FFO) which in the last three years has averaged annually around USD92 million, and an available committed credit line of USD30 million. As of June 30, 2013, the company had USD35 million of cash and marketable securities and USD203 million of short-term debt.
NEGATIVE FCF UNTIL 2014
Fitch expects a negative free cash flow (FCF) generation due to higher capex in 2013 and 2014. Imsa's capex program in 2013, 2014 and 2015 of around USD136 million, USD189 million, and USD64 million, respectively, includes the construction of two hydro electrical plants and two biomass/coal generation plants that will be fully operating by 2015 and 2016, as well as annual maintenance capex of approximately USD35 million. Fitch estimates that positive FCF generation could resume by the end of 2015. Imsa does not have a formal dividend policy but management's guidance is that dividend payment would be around USD20 million annually. Fitch considers that the company has financial flexibility to manage its capex requirements and dividend payment if there is a pressure in its liquidity position.
Imsa's operating performance has followed a continuous growth through the cycle; however, operations are highly linked to the seasonality of the harvest period and sugar prices. In 2012 the company generated net sales and EBITDA of USD448 million and USD165 million, respectively, which represented an increase of 22% and 9%, when compared to 2011. Higher volume sales of sugar and EBITDA generation from electricity contributed mainly to this increase. Fitch expects that the company's sales and EBITDA maintain a positive growth over the cycle supported by higher sales of electricity that will offset an scenario of lower sugar sale prices over the long term. Fitch estimates that EBITDA generation in 2013 will be at lower levels than 2012, mainly as a result of declining sugar prices during the year.
RATING SENSITIVITY
The ratings could be pressured by a deterioration of the company's operating performance due to industry trends or economic activity resulting in higher leverage ratios and weaker liquidity position than Fitch's expectation. Fitch does not anticipate positive ratings actions in the midterm; however, a combination of debt reduction, higher operating income, and positive free cash flow generation leading to a sustained improvement in the company's financial position and capital structure, would be viewed as positive to credit quality.
Additional information is available 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating
Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating
Methodology - Effective from 8 August 2012 - 5 August 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=807086
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