NEW YORK--()--Fitch Ratings has assigned a 'BBB' expected rating to Alicorp S.A.A.'s (Alicorp) proposed USD450 million, senior unsecured notes due 2023. Proceeds from the debt issuance will be used to repay debt and finance capital expenses.
Fitch has also assigned the following ratings:
--Local and Foreign Currency Issuer Default Rating (IDR) of 'BBB';
--Senior unsecured debt rating of 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Alicorp's investment-grade ratings reflect the company's strong market position in the Peruvian consumer products industry due to its leading brands, broad product portfolio and extensive distribution network. These factors combine to give the company strong competitive advantages and present formidable barriers to entry. The ratings also factor in Alicorp's solid capital structure and cash flow generation. A positive business environment, as well as a growing middle class in Peru, is expected to support the company's organic growth. Alicorp is part of the Romero Group, one of the largest economic groups in Peru.
The ratings incorporate the company's exposure to commodity and currency risks and the spike in leverage due to the company's expansion program. The company recently closed two new debt-funded acquisitions in Peru and one in Brazil which will increase leverage to about 3x on a pro-forma basis.
Strong Market Position in Peru
Alicorp is a leading consumer products company in Peru with more than 120 brands under management. The company's Peruvian operations account for 82.3% of its total revenues and 82.9% of its EBITDA as of Dec. 31, 2012. The balance of revenues and EBITDA are primarily generated in Ecuador (rated 'B-' by Fitch) and Argentina ('CC'), countries with higher sovereign risk than Peru.
In Peru, Alicorp has an extensive network of exclusive distributors that is customized to the specificities of the Peruvian market, which relies on small 'Mom-and-Pop' type shops, because of the low penetration of supermarkets. About 75% of the company's products reach the end consumer through those small shops. The company sells to the Mom-and-Pops through its exclusive distributors (25% of Alicorp's total sales) and wholesalers (50% of sales). Fitch expects strong medium-term fundamentals for organic growth in Peru. Sales will be boosted by a growing middle class with increased purchasing power. Increased credit availability is also spurring demand.
Expected Revenue Growth and High Margins
Alicorp's revenues are expected to grow at a pace higher than the company's historical CAGR average of 5.2% (2008-2012) during 2013. Growth is due to an aggressive expansion strategy and commodity-related price increases. During December 2012, the company started a new plant in Ecuador and in Sept. 2012 it acquired the Chilean company, Salmofood. As of Dec. 31, 2012, Alicorp's total revenues were PEN4,474 million (USD 1.7 billion), an increase of 5.1% compared to 2011. During 2012, Alicorp generated PEN560 million (USD 213 million) of EBITDA.
The company's EBITDA margins have fallen from 14.5% in 2010 to 13.0% in 2011 and to 12.5% in 2012. Branded consumer products that command higher, more stable margins accounted for 59.0% of revenues and EBITDA in 2012. Fitch expects that EBITDA margins will gradually improve to 13%. Acquisition of lower margin businesses remains a risk that could prohibit an improvement in margins.
Leverage Increase due to Acquisitions
During the past three years, Alicorp's leverage has remained around 1.0x. However, leverage has recently increased above this level, as a result of new acquisitions and the financing of related inventories. Pro forma for the transactions mentioned below, the company's leverage is more than 3.0x.
During February 2013, Alicorp purchased for USD96 million a 100% stake in Pastificio Santa Amalia S.A., a Brazilian company that manufactures pastas, jelly, chocolate powder, cookies, panettones, sauces, among others, and distributes third-party personal care and home products. This company has over 50 years of experience in the Brazilian market and is a leading pasta player in Brazil, and No.1 pasta player in the estate of Minas Gerais. During January 2013, Alicorp completed the acquisition of the Peruvian consumer products company Industrias Teal (IT) for USD160 million. This acquisition allows the company to diversify its production into new categories (confectionary, chocolates and panettones) and consolidate its leadership in pastas, cookies, and flours in Peru. Alicorp also acquired Industria Nacional de Conservas Alimenticias S.A. (Incalsa) in Peru for USD23.5 million at the end of 2012. Incalsa mainly produces sauces for restaurants.
Fitch believes that Alicorp's strong business fundamentals and growing EBITDA should allow the company to quickly reduce its leverage ratios to historical levels. Nominal debt reduction is not anticipated, since free cash flow is expected to be negative in 2013 due to anticipated capital expenditures of about USD130 million.
Exposure to Commodity and Currency Risks
As of December 2012, about 55% of Alicorp's revenues are generated by commodity products such as flour, edible oils and animal nutrition. The company's main raw materials are also commodities such as wheat and soybean. Although Alicorp is the main importer of soybean oil and wheat in Peru, accounting for 50% and 53% of the total imports, respectively, its large scale and good market position in Peru do not provide full protection from commodity price increases. The reduction of profit margins in 2011 was indicative of the company's inability to quickly pass through prices increases for raw materials to the end consumers.
About 53% of Alicorp's cost of goods sold and about 80% of its debt are U.S. dollar-denominated, while its operating income is almost entirely in local currencies. The company hedges up to 50% of its projected cash flow net exposure to foreign currency on a rolling basis. The debt currency exposure, however, remains almost entirely unhedged.
Strong Equity Holder
While Alicorp's credit quality does not benefit from explicit guarantees, Fitch considers it a positive that the company is part of The Romero Group, one of the largest economic groups in Peru. Grupo Romero has a presence regionally (Colombia, Ecuador and Bolivia) and across 20 different countries. The Romero Group (excluding related companies: Credicorp and Subsidiaries) reported sales of USD4.8 billion and EBITDA of USD435 million in 2011.
Alicorp's ratings are not likely to be upgraded in the short-to-medium term. Considerations for a Positive Outlook would be additional geographic diversification in countries with similar or lower sovereign risk than Peru. Improvements in the company's margins in its existing markets would also be viewed favorably.
A negative rating action could be taken if leverage, as measured by total debt/EBITDA, increased and remained at a level of more than 1.5x for a prolonged period of time, due to operational deterioration, unexpectedly high acquisition activity, or large dividend distributions.
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' dated Aug. 08, 2012;
--'Parent and Subsidiary Rating Linkage' dated Aug. 08, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage