MONTERREY, Mexico--(BUSINESS WIRE)--Link to Fitch Ratings' Report: Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Fitch Ratings has assigned the following ratings to Grupo IDESA S.A. de C.V.:
--Long-term Issuer Default Rating (IDR) 'BB-';
--Local currency long-term IDR 'BB-';
--Proposed up to USD300 million senior unsecured notes due 2023 'BB-(exp)'.
The Rating Outlook is Stable.
The ratings reflect IDESA's strong business position, low relative cost base advantage, long-term relationships with customers and suppliers, and history of conservative financial management. They also reflect IDESA's new scale and ability to integrate acquisitions and the increasing contribution of its distribution division.
Factored into the ratings are the company's debt and capital structure after the proposed new senior notes issuance and its history of positive free cash flow (FCF) generation. Fitch expects recent investments in non-consolidated joint ventures to start contributing to FCF only in the long term. IDESA's ability to service proposed debt will primarily depend on current operations.
Proceeds from the offering will be used to fully refinance USD195 million of existing debt and for general corporate purposes including CAPEX and other investments.
KEY RATING DRIVERS
Risk profile and cost position:
High product-portfolio reliance on commodity chemicals limits IDESA's pricing power, but revenue volatility is partially offset by the company's low-cost production advantage. IDESA's main product prices are highly correlated to the price of oil which remains above Fitch's long-term base case expectations. While oil prices could rise higher for non-fundamental reasons, Fitch believes that price risks on the downside remain significant. Fitch does not expect the price of ethane-based ethylene oxide (EO) - IDESA's main raw material - to increase meaningfully until 2015 and 2016 when demand for ethane is expected to increase as planned ethylene capacity additions in North America begin operations.
Strong business position:
IDESA generates a majority of EBITDA from key product lines with market-leading positions such as ethylene glycols (EG) and ethanol amines (EA). In EG, where domestic demand outstrips supply and raw material availability constrains capacity utilization, the company is Mexico's largest producer with 36% of domestic market share. In EA, IDESA serves 63% of the domestic market and also exports over 60% of production to Europe, Asia and South America. IDESA's distribution business, Alveg Distribucion Quimica, has one of the widest product portfolios and country-wide storing and distribution facilities.
Regional, product and end-market diversification:
IDESA's revenue and cash flow predictability are supported by the company's national footprint, adequate product diversification, and solid exposure to resilient consumer-driven end-markets in Mexico. The diverse application of EA and the stability of EG demand as a raw material for the production of PET partially mitigate risks inherent in IDESA's business. Strategically going forward, the company expects to continue to gain presence in high-growth markets such as automotive, oil & gas and building materials.
Country, production site and supplier concentration:
The traits of a concentrated operation make IDESA vulnerable to potential disruptions in production at IDESA or PEMEX facilities as well more prone to economic slowdown in the Mexican economy. About 90% of IDESA's total revenues come from the domestic market. Production capacity is heavily concentrated in IDESA's Coatzacoalcos plant, which in turn is very dependent on smooth operations at PEMEX, IDESA's sole supplier of EO.
Scale momentum:
Fitch expects that involvement in high-profile joint ventures, available capacity in some petrochemical product lines and in logistics coupled with expected growth in distribution to support IDESA's growth. By the end of 2013, IDESA will have grown revenues and EBITDA by over 4x and 5x, respectively, in the last 10 years. This solid growth, fuelled by both organic and inorganic growth initiatives and involvement in prominent joint ventures, strengthens IDESA's position as one of the leading petrochemical companies in Mexico.
Positive free cash flow:
Fitch expects IDESA to generate positive free cash flow (FCF) through the cycle, with mid-cycle FCF in the range of MXN370 million to MXN390 million because of IDESA's low-cost advantage, high ratio of variable- to-fixed costs, conservative dividend payout and planned maintenance capital expenditures (CAPEX). For the last 12 months (LTM) ending September 2013, IDESA generated MXN313 million of FCF.
High leverage:
Fitch expects debt-to-EBITDA levels below 4.4x for the next 18 to 24 months and continued strengthening in leverage ratios in the years after. Fitch also expects changes in leverage to be driven by the impact of product-to-feedstock spreads on EBITDA with EBITDA growth gaining increasing importance over time. Fitch estimates mid-cycle EBITDA to range between MXN850 million to MXN900 million. In the LTM ending Sept.30, 2013, IDESA generated MXN827 million of EBITDA while debt-to-EBITDA was 3.0x.
IDESA's ratings take into account that the proceeds from the issuance of senior notes will be used to refinance existing debt, and for funding general corporate expenses including CAPEX. Existing debt in the form of a syndicated long-term loan contains covenants that could limit the company's financial flexibility and in turn could put pressure on the ratings. IDESA will evaluate different alternatives in case the bond offering does not take place.
RATINGS SENSITIVITY
Future developments that may, individually or collectively, lead to a negative rating action include:
Reduced financial flexibility, material contraction in product-to-feedstock margins or in FCF, or larger-than-expected leverage, higher capital outlays or cash distributions.
Future developments that may, individually or collectively, lead to a positive rating action include:
Fitch does not expect positive rating actions in the medium term. However, deleveraging, robust operating rates, diversification, conservative capital spending, increased size and tangible benefits from joint venture investments could have positive implications for the ratings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 5, 2013.
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=810193
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