CHICAGO & MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the Foreign Currency (FC) and Local Currency (LC) Issuer Default Ratings (IDRs) of Grupo Ferroviario Mexicano (GFM) at 'BBB+' and the National scale and debt ratings of Ferrocarril Mexicano S.A. de C.V. (Ferromex) at 'AAA(mex)'. The Rating Outlook is Stable.
KEY RATING DRIVERS:
Strong Credit Linkage to Grupo Mexico:
The rating affirmations for GFM and Ferromex follow the affirmation of Grupo Mexico S.A.B. de C.V's (Grupo Mexico) and subsidiaries' IDRs on Nov. 27, 2013 at 'BBB+' with a Stable Outlook. Ferromex's ratings are supported by the strong legal and operational ties with its parent, GFM, which owns 100% of Ferromex. GFM is in turn owned 74% by Infrestructura y Transportes (ITM) and 26% by Union Pacific. ITM is 74.9% owned by Grupo Mexico. ITM is also the parent company for Infraestructura y Transportes Ferroviarios (ITF), which in turn owns 100% of Ferrosur, and 100% of Texas Pacifico Transportation Ltd (Texas Pacifico) in West Texas, U.S. Ferrosur has a 9% market share in Mexico with its railroad network located in the south-east of the country. The rating linkages follow Fitch's parent and subsidiary criteria.
Leading Railroad Position in Mexico:
The ratings are also supported by the company's leading position within the Mexican railroad transportation sector with a 55% market share of railway load distribution (calculated by million tons-km). This compares to the next largest domestic competitor, Kansas City Southern de Mexico S.A. de C.V. (KCSM, Fitch long-term IDR of 'BBB-'; Stable Outlook) with a 34% market share. Ferrosur has a 9% market share, with other regional lines comprising the other 2%. Railroad transportation penetration in Mexico is low and has significant potential for future growth, with trucks accounting for 74% of transportation and rail only accounting for 26% in 2012.
Robust Standalone Credit Metrics:
GFM has a strong standalone credit profile. For the latest 12 months (LTM) to Sept. 30, 2013, the company generated USD535 million of EBITDAR with an EBITDAR margin of 33%. Fitch's base case indicates EBITDAR in the region of USD532 million with an EBITDAR margin of 36% for 2013. This compares to USD505 million of EBITDAR and an EBITDAR margin of 38% in 2012. The year-over-year improvement was due to collecting the benefits of the 2011 capex program to improve operational efficiencies. These included longer trains and more fuel efficient locomotives, with the rollout still ongoing. Longer trains helped to reduce the total number of trains required to be operated during the period, reducing costs. The higher cargo volumes carried by the longer trains also improved the company's profit margins. Fitch expects GFM to produce EBITDAR margins above 30% from 2014-2017 under its base case scenario, with net debt-to-EBITDAR ratios remaining below 2.0x.
Cash Flow Generation Positive Through-the-Cycle:
GFM has exhibited strong cash flows since 2008, with positive free cash flow (FCF) every year except 2011, when it recorded negative FCF of USD139 million as a result of the large capex of USD284 million to improve efficiency and dividends of USD100 million. The company's FCF in 2012 was USD126 million after capex of USD213 million and a low dividend payment of USD50 million. Total capex for GFM in 2013 is expected in the region of USD300 million, higher than the USD212 million spent in 2012, and dividends are expected to be around USD125 million, resulting in FCF for the year of negative USD88 million. Fitch's base case indicates a return to positive FCF from 2014 onwards. The company's total debt-to-EBITDAR and net debt-to-EBITDAR ratios for 2013 are expected to fall in the region of 1.8x and 1.6x, respectively, close to levels reported as of the LTM to Sept. 30, 2013.
Refinancing Risk is Low:
GFM has low refinancing risk with USD85 million of cash and marketable securities as of Sept. 30, 2013 compared to short-term debt of USD26 million, corresponding to a cash-to-short-term debt coverage ratio of 3.3x. The company benefits from its majority ownership by Grupo Mexico which reported consolidated cash and marketable securities of over USD3 billion as of Sept. 30, 2013. Fitch would expect Grupo Mexico to provide GFM with liquidity assistance in the form of lower dividends, capex requirements, or other tangible resources, in the event that it is required.
Grupo Mexico's Strategic Assets in Railroad Transportation:
Ferromex possesses Mexico's largest railroad with a track network of 8,111km, covering approximately 70% of Mexico's territory. The company connects with five gateways across the Mexico-U.S. border and has access to four seaports on the Pacific Ocean and two seaports on the Gulf of Mexico. In comparison, Ferrosur has 1,690km of track networks in Mexico. Together, Ferromex and Ferrosur, via ITM, have a combined market share of 67% in the Mexican railroad transport sector. Texas Pacifico has 616km of track network that runs from the Mexican-U.S. border Ojinaga-Presido to San Angelo Junction, and provides a key strategic cross-border presence to Grupo Mexico's comprehensive railroad transportation network.
RATING SENSITIVITIES:
GFM and Ferromex's ratings are tied to those of their ultimate controlling shareholder, Grupo Mexico. Future rating actions will continue to mirror those taken on Grupo Mexico and its other subsidiaries.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug 8, 2012);
--'Evaluating Corporate Governance' (Dec. 13, 2011).
Applicable Criteria and Related Research:
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=694649
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=809716
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