MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Alpek, S.A.B. de C.V.'s (Alpek) up to USD300 million proposed senior notes due 2023. Proceeds from the proposed issuance will be used for general corporate purposes, which may include the repayment or retirement of existing indebtedness.
KEY RATING DRIVERS
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 generation and low leverage. Fitch expects that Alpek's ratio of net debt to 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.
Product and Geographic Diversification Supports Business Profile
Alpek's businesses are divided in the polyester chain (PTA, PET and fibers), through its subsidiary Grupo Petrotemex, S.A. de C.V. (Petrotemex, rated 'BBB-'/Stable by Fitch), which represents approximately 70%-75% of Alpek's consolidated revenues and EBITDA, and the plastics and chemicals segment, which main products are polypropylene (PP), expanded polystyrene (EPS), caprolactam (CPL) and fertilizers, among others. The company holds leading market positions in PTA and PET in North America, where prices are set using a cost plus formula, allowing Alpek's operations to maintain stable cash flows. In addition, the company is the sole producer of PP in Mexico through its joint venture (JV) with LyondellBasell, has important participation in Mexico and North American EPS markets through its JV with BASF and is the sole producer of CPL in Mexico with most of its production dedicated to exports.
Alpek's operations have maintained high utilization rates, which in turn has translated into better fixed cost absorption and stable cash flows. The company's customer base operates mostly in less volatile industries, such as food and beverage, packaging and consumer goods end markets. In addition, the company has long-term relationships with suppliers and clients and, in the case of Petrotemex, long-term contracts.
In recent years, Alpek growth through acquisitions, especially in the PTA/PET segment, and organic expansions has positioned it as a major player in the polyester chain in North America, which strengthens its business profile and allows it to operate in a less volatile market. The consolidation of the polyester industry in North America has resulted in market rationalization and ease competitive pressures. Volumes in the region should be driven by stable customer demand and the expectation of no additional capacity in the near term. Fitch expects the company will continue investing in efficiency projects, as well as capacity growth, with a combination of green field investments and potential acquisitions.
During 1H13 Alpek's results and profitability have been affected by lower volumes in the polyester segment and a difficult pricing environment since the second half of 2012, although recently, prices across the company's product portfolio have shown improvement and stability. In addition, the company announced the closure of its production site in Cape Fear, NC. This site was less efficient than other operations; Alpek will distribute the capacity within the rest of its production facilities in North America and expects to achieve savings of approximately USD30 million per year. As part of the closure process, the company recorded at the EBIT level non-recurring charges of approximately USD184 million, including asset impairment charges and expense provisions. The total effect on net income was approximately USD114 million considering deferred taxes.
Solid Financial Profile
The ratings consider the company's strong cash flow generation reflecting high and efficient capacity utilization rates, long term contracts and relationships with clients, cost-plus pricing formula in the 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 recent IPO completed in 2Q2012. Event risk is still present, nevertheless 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 leverage may increase to approximately 2.0x but with a firm reduction trend towards 1.5x once the projects mature.
Low leverage and Adequate Liquidity
The ratings incorporate the expectation of Alpek's leverage will remain low. After debt reduction coming from the recent IPO and internally generated cash, the company's Total Debt to EBITDA for the last 12 months ended June 30 2013 in dollar terms was 1.6x and Net Debt to EBITDA 1.1x (pro forma without the non-recurring, non-cash charges). Fitch expects these credit metrics will remain relatively stable in the future.
As of June 30, 2013, Alpek's cash and marketable securities balance was approximately USD460 million, short-term debt was USD61 million and total debt USD1.1 billion. Total debt balance is expected to slightly increase on a pro forma basis considering the proposed issuance and remain relatively stable in the next years. Fitch expects the company will use a portion of the proceeds from the proposed senior notes issuance to refinance existing indebtedness. The company's liquidity is further supported by committed credit lines of USD295 million; availability under these facilities as of June 30 2013 is approximately USD290 million.
RATINGS SENSITIVITIES
A negative rating action could arise from a combination of sharp and consistent reductions in volumes, profitability and cash flow generation resulting in lower fixed-cost absorption and weaker main credit metrics. A larger than expected debt-financed acquisition that impacts the company's capital structure away from the target net debt to EBITDA of 1.5x on the long-term should also pressure the ratings. Positive rating actions are limited at the time and could be supported by consistent positive free cash flow generation through economic cycles combined with the expectation of lower leverage levels in the mid to long term.
Fitch currently rates Alpek as follows:
--Local currency Issuer Default Rating (IDR) 'BBB-';
--Foreign currency IDR 'BBB-';
--USD650 million Senior notes due 2022 'BBB-';
The Rating Outlook is Stable
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
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