MONTERREY, Mexico--()--Fitch Ratings has affirmed Mexichem, S.A.B. de C.V.'s (Mexichem) ratings as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BBB-';
--Local currency IDR at 'BBB-';
--Long-term national scale rating at 'AA(mex)' ;
--USD350 million senior unsecured notes due 2019 at 'BBB-' (outstanding balance USD83 million);
--USD750 million senior unsecured notes due 2022 at 'BBB-';
--USD400 million senior unsecured notes due 2042 at 'BBB-';
--MXN4,500 million Local Certificados Bursatiles due 2016 at 'AA(mex)';
--MXN3,000 million Local Certificados Bursatiles due 2022 at 'AA(mex)'.
The Rating Outlook is Stable
Mexichem's ratings reflect its robust credit profile, underpinned by the company's recurring positive free cash flow and its strong business profile as a leading vertically integrated chemical and petrochemical company in Mexico, with a geographically diversified operating base. The company has important market shares and presence in Latin America, United States, Europe and Japan. The ratings are also supported by the company's competitive cost structure. Mexichem's ratings reflect how the company's operating and financial profile help provide flexibility to face and complete its strategic expansion plan. Fitch expects that the company's leverage will remain at or below management's target of a net debt to EBITDA ratio below 2.0 times (x). The ratings are limited by Mexichem's aggressive growth strategy through acquisitions and green field projects, strong competition in all markets where it operates, as well as the cyclical nature of the chemical and construction industries.
Continued Strong Business Position
Mexichem maintained its growth strategy organically and through acquisitions. During 2012 the company completed the acquisition of Wavin N.V , a European manufacturer of plastic pipes and fittings for a total of EUR530million, and assumed debt of approximately EUR300million. Wavin generated EBITDA of approximately EUR95million in 2011. The integration of Wavin brings to Mexichem increased geographic reach, expanded product portfolio for existing markets, technology and synergies based in scale. The company expects to capture approximately USD75million in synergies during 2012 - 2013. Also during 2012 the company strengthened its fluorine mining operations with the acquisition of a high grade ore mine in Mexico for a total amount of USD75million. The execution of the company's growth strategy has been in line with maintaining net leverage at or below 2.0x.
The company's strong market position, especially in Mexico and Latin America, reflects ample product offering, extended distribution network throughout the region, low cost structure, technology and financial flexibility. The company operates in more than 40 countries, has over 90 plants and 17,000 employees.
Competitive Cost Structure
Mexichem's vertical integration strategy has resulted in solid and stable profitability through the years. The company's strategy continues to focus on adding value to the main raw materials source of the company: salt dome and fluorspar. In addition, Mexichem has developed in-house technology and has a low production cost given favorable labor and geographic conditions. North American petrochemical and chemical companies have benefited in recent years from low raw material costs as a result of the availability of natural gas coming from shale gas developments in the region. Mexichem has taken advantage of these dynamics in conjunction with important demand in Latin America, as well as favorable market conditions in the fluorine segment. Consolidated EBITDA margin for the past three years has been 22% and Fitch expects it to remain relatively stable.
Aggressive Growth, Consistent Financing Strategy
Mexichem has maintained its solid credit profile, characterized by management's long-term target of net debt to EBITDA at or below 2.0x, while executing its growth strategy of 20% increase per year. Management has maintained financial discipline through a combination of debt, equity, internal cash generation and asset sales. Along the cycle Mexichem has been able to maintain robust credit ratios. Fitch expects Mexichem will continue generating strong cash flows to support operations, working capital requirements, capex and dividend payments, while maintaining credit metrics at current levels. Total debt to EBITDA for the last twelve months (LTM) ended Sep.30 2012 was 2.6x and net debt to EBITDA 2.0x considering the consolidation of Wavin since May 2012. On a pro forma basis, net leverage would be 1.8x considering 12 months of Wavin operations.
Strategic Capex Plan Underway; Expected Stable Credit Profile
Mexichem's total investment plan for the period 2013 - 2016 is approximately USD2.0 billion, including potential acquisitions, and should be financed through a mix of cash on hand from the recent equity offering and internal cash flow generation. The main projects are the Pemex JV for vinyl chloride monomer (vcm) production and the proposed joint project with Oxy for upstream integration in the ethane/ethylene production, which are expected to strengthen the company's competitive position. These projects would represent total investments for Mexichem of approximately USD950 million. The company continues evaluating future acquisitions to complement its product portfolio and increase competitiveness. During October 2012 Mexichem completed an equity offering for approximately USD1.0 billion which will be deployed to support future growth.
What Could Trigger A Rating Action
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--Slowdown of the construction and infrastructure industries in Latin America, increased competition, change in the fluorite dynamics globally, which in turn could affect the company's profitability, cash flows and leverage levels.
-- Large acquisitions/investments financed mostly with debt resulting in an expectation of higher debt levels in the mid to long term.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
-- Definition in the visibility of conclusion, start up and stabilization of announced investments, and full integration of recently acquired operations, maintaining a strong credit profile;
-- A change in management's aggressive growth strategy combined with a continued commitment to maintain strong credit profile.
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. 08, 2012);
--'National Ratings Criteria' (Jan. 19, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
National Ratings Criteria