MONTERREY, Mexico--()--Fitch Ratings has assigned the following ratings to Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (GCC):
--Long-Term Issuer Default Rating (IDR) 'B+';
--Local Currency Long-Term IDR 'B+'
--Proposed 5 to 10 years senior secured notes 'BB-/RR3' up to USD260 million
The Rating Outlook is Stable
The expected recovery ratings of 'RR3' reflect good recovery prospects given default. 'RR3' rated securities have characteristics consistent with securities historically recovering 51% - 70% of current principal and related interest.
GCC's ratings reflects the company's solid business position in the cement, ready mix and aggregates segments in the regions where it has a presence; diversified operations in Mexico and U.S. in the non-residential and residential sectors; as well as positive free cash flow generation through the recent industry cycle. The ratings are limited by the company's high leverage, pressure on profitability given market and competitive conditions, and geographic concentration in one Mexican State and the Central/Mountain region in the U.S.
The company plans to issue senior secured notes up to $260 million USD. The notes will be secured by substantially all shares of its subsidiaries: GCC Cemento, S.A. de C.V., Cementos de Chihuahua S.A. de C.V., and GCC of America, Inc... The notes will also be guaranteed by these three subsidiaries.
Additionally the company will obtain a syndicated bank facility for $250 million USD that will share the security package with the notes and will have scheduled maturities of USD4 million in 2013, USD20 million in 2014, USD53 million in 2015, USD83 million in 2016 and USD91 million in 2017. Proceeds from the proposed notes and the syndicated bank loan will be used to refinance the company's total existing indebtedness.
CONSTRUCTION ACTIVITY DRIVING PROFITABILITY
The recent global crisis has affected the construction activity in Mexico and the U.S. GCC volumes of cement decreased 11% from 2007 to 2011, with Mexico decreasing 11% and the U.S. 10%. In contrast, according to the Portland Cement Association (PCA) national cement consumption in the U.S. fell over 40% to 72 million metric tons from 117 million in the same period. In Mexico, in addition to the economic slowdown, the volume reduction was also influenced by insecurity issues in the State of Chihuahua.
GCC's revenues decreased to USD579 million in 2011 from USD722 million in 2008 as a result of lower volumes and tough competition which affected prices. The company's U.S. revenues decreased 17.8% to USD373 million while its Mexican operations fell 23% to USD206 million. Consolidated EBITDA margin also was pressured to 18% in 2011 from 29% in 2008.
During the first nine months of 2012, the company's volumes have recovered 13% from the same period a year ago, with Mexico relatively flat and the U.S. contributing with an important 19%. The States where GCC operates have shown better volume dynamics than the US national average. On the other hand, prices have remained under pressure as a result of intense competition and industry oversupply.
GCC has expanded its geographic reach to existing and new customers, which in turn has translated into higher operating costs and expenses. For the latest-twelve-month (LTM), EBITDA margin stood at 18.5%, similar to fiscal year (FY) 2011 but below 22.5% in 2010, 26.6% in 2009 and 28.5% in 2008. A better pricing environment driven by better industry prospects in the U.S. residential construction in 2013 and 2014, would allow GCC to improve operating results due to better fixed-cost absorption.
BUSINESS POSITION SUPPORTED BY LEADING MARKET SHARES
GCC is leader in the State of Chihuahua in all product segments and has relevant cement market positions in North Dakota, South Dakota, Wyoming, Colorado, New Mexico and Texas (in El Paso). These markets were less affected during the U.S. housing crisis, and have shown above average volume recovery in 2012, according to the PCA. Higher consumption in the northern states is related to increased exploration and drilling of oil and gas fields and related activities, as well as agricultural positive dynamism. In Mexico, increased government and housing related activities are expected to support current trends.
LEVERAGE IMPROVING BUT STILL HIGH
Fitch expects that the company's total debt/EBITDA at the end of 2013 will be similar at current levels of approximately 4.0x. GCC's leverage remains high despite the company's management debt reduction efforts through internal free cash flow generation and asset sales. These actions have resulted in debt repayments of around USD220 million since the second quarter of 2010. At the end of 2011 the company sold its 49% stake in its Bolivian subsidiary (SOBOCE) for approximately USD75 million which was used to pay down debt. For the LTM ended Sept. 30 2012, GCC's total debt to EBITDA ratio was 4.4x which compares favorably with 5.4x registered in the same period of 2011 and to 5.6x and 5.0x at year end 2011 and 2010, respectively.
On the other hand, GCC's EBITDA/gross interest expense coverage has improved in recent quarters reaching 3.1x for the LTM ended in Sep. 30, 2012, compared to 2.1x in the same period of 2011 and to 2.6x and 2.4x at year end 2011 and 2010, respectively.
POSITIVE FREE CASH FLOW GENERATION THROUGH THE CYCLE
Fitch expects the company will continue generating stable free cash flows as recovery in its main markets continues. Factored in the ratings is the company's positive free cash flow generation in the past years, which in conjunction with asset sales has been used to reduce debt levels. Total debt as of Sept. 30, 2012 was USD518 million, down from USD663 million at the end of 2010. For the LTM period ended Sep. 30, 2012 the company generated free cash flow (FCF) of around USD25 million after capex of USD35 million and dividend received of USD4 million. During 2011, 2010 and 2009 FCF averaged over USD55 million. The company estimates a normalized capex level of USD40-50 million for the following years.
LIQUIDITY SUPPORTED BY CASH GENERATION
The company intends to strengthen its liquidity position with the execution of its liability management strategy, which will allow it to adjust debt maturities to cash flows and extend its debt average life. At Sept. 30, 2012 GCC had total debt of USD518 million, short-term debt of USD95 million and USD74 million of cash and marketable securities. During the LTM ended Sept. 30, 2012, GCC generated USD115 million of EBITDA, an increase from USD107 million during FY2011 but a decline compared to USD119 million during FY2010. The company's cash flow from operations (CFFO) during the LTM ended Sept. 30, 2012 was USD55.3 million, a decline from USD65.1 million and USD65.4 million at year end 2011 and 2010, respectively. The drop in operating cash flow was primarily due to price competition and higher costs.
Lower Profitability and Cash Generation: A negative rating action could be triggered by a deterioration of the company's credit protection measures and cash position due to weak operational results, reflecting increased price competition or higher costs, deterioration in FCF generation driven by increasing working capital needs and Capex, and declining EBITDA margins. Another factor that can likely result in a downgrade is if the debt to EBITDA ratios is consistently at or beyond 5.0x.
On the other hand, positive rating actions could derive from a better operative performance due to price increases and costs contention initiatives, following a recovery in the U.S. residential sector resulting in higher gross margins and EBITDA generation, in addition to the expectation that total debt to EBITDA will remain below 4.0x over time, while maintaining adequate liquidity and a manageable debt maturity 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. 8, 2012);
--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Nov. 13, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers