MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Alpek, S.A.B. de C.V.'s (Alpek) local and foreign currency Issuer Default Ratings (IDRs) and senior unsecured notes at 'BBB-'. In addition, Fitch has affirmed Grupo Petrotemex, S.A. de C.V.'s (Petrotemex) local and foreign currency IDRs at 'BBB-' and DAK Americas LLC's (DAK) foreign currency IDR at 'BBB-'. The Rating Outlook for the three entities is Stable. A complete list of related rating actions is provided at the end of this release.
Alpek's ratings reflect its strong business profile in the petrochemical segment in Mexico and the Americas, supported by leading positions in its different product lines, especially in the polyester chain in North America; low cost structure as a result of important investments in technology, as well as geographic location and scale; solid customer base and end markets' resilience to economic downturns. The ratings consider the company's solid financial profile characterized by constant positive free cash flow (FCF) generation and low leverage. Fitch expects Alpek's ratio of net debt to consolidated EBITDA in the long term to be around 1.5x. Also incorporated in the company's ratings are the cyclical nature of the industry, strong competitive environment and Alpek's historic acquisition track record.
Under Fitch's approach to rating entities within a corporate group structure, Alpek and Petrotemex are rated the same as the linkage among them is considered strong. Some of the factors for the strong linkage include the integration of operations and management as well as debt guaranteed by the subsidiary and cross default provisions.
KEY RATING DRIVERS
Strong Market Positions in Key Products
In Aplek's polyester segment, the company holds leading market positions in North America for both Purified Terephthalic Acid (PTA) and Polyethylene Terephthalate (PET). In its plastics & chemicals division, the company holds strong market positions in Polypropylene (PP), Expandable Polystyrene (EPS) and Caprolactam (CPL); the company is the sole producer of PP in Mexico and through its joint venture (JV) with LyondellBasell, holds an important market share. The company recently announced an agreement with BASF that upon closing will position Alpek as a leader of EPS throughout the Americas. Alpek is the sole producer of CPL in Mexico with most of its production dedicated to exports.
Product to Feedstock Spread Contraction
Since the first half of 2012 (1H'12), pressures on PET export prices and lower reference PTA margins in Asia have reduced the company's profitability. In addition, CPL export prices have declined as a result of incremental capacity coming from China. PET and CPL prices have recovered slightly and appear to have stabilized. In Fitch's view, spread recovery from the second quarter of 2014 (2Q'14) levels, if any, will be modest in 2H'14. Current PTA overcapacity in Asia and the possibility of additional capacity coming on line will limit upside spread recovery in 2015. Further downside however, is also likely to be limited considering producer cash costs. In the medium term, industry shut downs of less efficient operations and global economic growth should help to alleviate supply and demand imbalances.
Solid Financial Profile
The ratings consider the company's strong cash flow generation reflecting high capacity utilization rates, long term contracts and relationships with clients, cost-plus pricing formula in the North American PTA segment and strict cost and expenses control initiatives, among other factors. Also factored in the ratings is the company's growth strategy which has been financed with a combination of debt, internal generated funds and equity. Alpek's liquidity profile is solid and was strengthened with the proceeds from the IPO completed in 2Q'12. Fitch's analysis incorporates the company's strong commitment to support a robust financial profile going forward and that any likely investment will be completed with internally generated cash flows and debt. Net consolidated leverage may approximate 2.0x but a firm reduction trend towards 1.5x once the projects mature is incorporated in the ratings.
Neutral FCF Considering Capex Pipeline
Fitch expects the company will continue investing in efficiency projects, as well as potentially invest in capacity growth and vertical integration, with a combination of green field investments and potential acquisitions. During 2Q'14, the company finalized the construction of its cogeneration plant in the State of Veracruz and management expects this facility will become fully operational in 4Q'14 contributing approximately USD40 million of incremental EBITDA per year. For the next two years, Fitch expects FCF after capex and dividends to be neutral to moderately negative as the company completes its current projects.
Adequate Leverage and Liquidity
The company's total debt to consolidated EBITDA for the last 12 months ended June 30, 2014 was 2.1x and net debt to consolidated EBITDA was 1.4x. Fitch expects these credit metrics will remain relatively stable in the medium term. As of June 30, 2014, Alpek's cash and marketable securities balance was approximately USD416 million, short-term debt was USD78 million and total debt was USD1.1 billion. Total debt has remained stable since 2012. The company's liquidity is further supported by undrawn committed credit lines as of June 30, 2014 of USD275 million.
RATINGS SENSITIVITIES
A negative rating action could arise from a combination of sharp and prolonged reductions in volume, profitability and cash flow generation resulting in lower fixed-cost absorption and weaker credit metrics. A larger than expected debt-financed acquisition or capital investment that impacts the company's capital structure away from a net debt to consolidated EBITDA of 1.5x in the long term would also pressure the ratings. Material deterioration in spreads that results in consolidated EBITDA significantly below Fitch's conservative base case of MXN6,500 million in 2014 and MXN7,100 million in 2015 not offset with similar reductions in discretionary capex and dividends or equity increases could also result in negative rating action.
Positive rating actions could be supported by consistent positive fCF generation through economic cycles and investment periods, product diversification and vertical integration across production chains, combined with the expectation of lower leverage levels in the mid to long term. Larger scale that allows the company to generate EBITDA greater than USD1 billion combined with conservative leverage levels in the lower range of management's target of net debt to consolidated EBITDA between 1.5x-2.5x could also have positive rating implications.
Fitch has affirmed the following ratings:
Alpek
--Local currency IDR at 'BBB-';
--Foreign currency IDR at 'BBB-';
--USD650 million senior notes due 2022 at 'BBB-';
--USD300 million senior notes due 2023 at 'BBB-'.
Petrotemex
--Local currency IDR at 'BBB-';
--Foreign currency IDR at 'BBB-'.
DAK
--Foreign currency IDR at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Parent and Subsidiary Rating Linkage (Fitch's Approach to Rating Entities within a Corporate Group Structure)' (Aug. 05, 2013).
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=749393
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=848794
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