MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed the foreign and local currency Issuer Default Ratings (IDRs) of Bio-PAPPEL, S.A.B. de C.V. (Bio-Pappel) at 'B'. Fitch has also affirmed Bio-Pappel's USD $250 million senior notes due 2016 at 'B/RR4'.
The Rating Outlook is Stable.
Bio-Pappel's ratings reflect its leading market position in the pulp and paper sector in Mexico, cost structure related to its strategy of only using recycled fibers, geographical diversification of revenues, low level of environmental/political risks, as well as the relatively stable EBITDA generation of the past three-years, due to a somewhat favorable operating environment. This environment has translated in a stable performance of its packaging division and a rebound in the performance of its paper division.
The ratings reflect Bio-Pappel's leverage relative to the stress upon its cash flow when raw material and energy costs rise, small scale when compared to international players, tough competitive environment, and weak debt repayment record. The 'RR/4' Recovery Rating reflects an average recovery prospects given default. 'RR4' rated securities have characteristics consistent with securities historically recovering 31% - 50% of current principal and related interest.
The company's performance over the last year is a result of a tightened spread between its average sales price and the cost of its main inputs, namely recycled paper products such as old corrugated containers (OCC) and old newspaper (ONP), as well as energy. This spread has averaged USD $73 per ton for the Last 12 Months (LTM) ended in 2Q'12, generating about USD $69 million of EBITDA, also in LTM terms, results that are below those of the same period in 2011, when the spread averaged USD $82 per ton and EBITDA was about USD $82 million.
The firm has and will continue making efforts to contain these costs by increasing its self sourcing of recycled fibers, by operational efficiencies, and by entering into financial hedges. Volatility in Bio-Pappel's operational performance over the past 10 years reflects the company's limited ability to pass through cost increases. Prices for OCC and ONP have increased in Mexico and the United States, due to purchases by Chinese manufacturers.
Energy is Bio-Pappel's second most important production cost after recycled fiber, and management has undertaken several initiatives seeking to mitigate its exposure to it, including investments in cogeneration and derivatives contracts. The ratings factor in this continued vulnerability to rising raw material and energy costs.
Reported total debt to EBITDA, as of 2Q'12 LTM, was 3.6 times (x) and EBITDA to interest expense was 3.3x; compared to full year 2011, which came about 5.1x and 2.9x, respectively. Currently, debt to EBITDA benefits from the adoption of IFRS, which allows for fair value accounting of debt. On nominal terms the ratio was 4.1x for 2Q'12 LTM (2.9x, on a net debt basis).
Going forward, Fitch expects that these ratios could slightly strengthen due to somewhat higher EBITDA generation. Fitch does not envision Bio-Pappel undertaking new debt issuances in the short term, so its debt maturity profile should remain stable, with most of its debt coming due in 2016.
Near-term liquidity risk is minimal as the company pays only 7% of interest on the 2016 notes (about $17.5 million USD per year) until the end of 2013, when the rate steps up to 10%. Should the market make an unfavorable turn, the company has a partial PIK option for 2010 up to 2012. Currently, the company holds about USD $80 million in cash and marketable securities.
Key Rating Drivers
Positive factors to credit quality would include the company improving and sustaining EBITDA margins due to operational efficiencies, successfully widening and stabilizing the spread between price and cost per ton, which in turn could result in more constant EBITDA generation, or a reduction in the company's indebtedness, which could reduce leverage's levels and variability. A persistent weakening of the spread between price and cost per ton, resulting in lower cash generation, could be a negative factor for the ratings.
Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (May 4, 2012);
--'Evaluating Corporate Governance' (Dec. 13, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=677740
Evaluating Corporate Governance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=657143
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