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 the company's USD250 million senior notes due 2016 at 'B/RR4'. Securities rated 'RR4' reflect average recovery prospects given default and have characteristics consistent with securities historically recovering 31% - 50% of current principal and related interest in event of a default.
The Rating Outlook is Stable.
The affirmation reflects Bio-Pappel's improved operating performance (driven primarily by its paper division) that has resulted in increased cash flow generation and lower leverage. In Fitch's opinion, operational efficiencies have increased profitability and somewhat diminished the company's sensitivity to raw material and energy cost increases, but it is still exposed to cyclicality.
Bio-Pappel's ratings remain limited by Fitch's concerns about the company's ability to refinance its senior note maturity in 2016. Using cash balances to pay debt in advance of the maturity or a successful refinancing could be positive factors for Bio-Pappel's credit quality and ratings.
KEY RATING DRIVERS
Bio-Pappel's ratings incorporate its leading market position in the pulp and paper sector in Mexico, improved cost structure related to its strategy of using only recycled fibers, geographical diversification of revenues, low level of environmental/political risks, the improved EBITDA generation due to operational efficiencies and a favorable operating environment. The latter has translated into a stable performance of its packaging division and a recovery in the performance of its paper division. The ratings are constrained by Bio-Pappel's leverage relative to the stress upon its cash flow when raw material and energy costs increase, small scale when compared to international players, tough competitive environment and a weak debt repayment record.
Cost Structure Improving:
Cost initiatives coming from efficiencies in the mix of using recycle fibers, debottlenecking of processes and energy savings due to cogeneration projects have improved the cost structure and better positioned the company to withstand cycle downturns. The company's performance over the last year is explained by an expanded spread between its average sales price and the cost of its main inputs, namely recycled paper products such as old corrugated containers (OCC), old newspaper (ONP), and energy. In addition, prices have remained relatively stable, and volumes have lightly declined as a result of a lower economic activity in Mexico, particularly in the first half of 2013. The spread has averaged USD143 per ton for the Last 12 Months (LTM) ended in 2Q'13, generating about USD141 million of EBITDA, also in LTM terms. These results are higher than those registered during the same period in 2012 when the spread averaged USD73 per ton and EBITDA was about USD69 million.
Volatility in Bio-Pappel's operational performance over the past 10 years has reflected the company's limited ability to pass through cost increases. Prices for OCC and ONP have increased in Mexico and the U.S. due to purchases by Chinese manufacturers. Energy is Bio-Pappel's second most important input 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. The company has and will continue to make efforts to contain these costs by increasing its self-sourcing of recycled fibers, continue gaining operational efficiencies, and by entering into financial hedges.
Leverage Low, Refinancing a Concern:
Going forward, Fitch expects that leverage ratios should fluctuate as EBITDA generation is still sensible to the industry's cyclicality and the price-cost spread. Total debt to EBITDA for the LTM ended June 30, 2013 was 1.8 times (x), net debt to EBITDA stood at 1.0x, and EBITDA to interest expense was 7.9x compared to full year 2012 with values of 2.2x and 6.2x, 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 2.0x for 2Q13 LTM (1.1x, on a net debt basis).
Near-term liquidity risk is low however refinancing risk in 2016 is a concern. The company pays only 7% of interest on the 2016 notes (approximately USD17.5 million per year) until the end of 2013, when the rate steps up to 10%. Currently, Bio-Pappel has close to USD117 million in cash and marketable securities, which supports short-term liquidity.
Factors that could lead to positive rating actions include the Bio-Pappel's successful refinancing of its 2016 maturity, given the company's history of debt restructurings, and/or using free cash flow to pre-pay debt. Other positive factors to credit quality include improving and sustaining EBITDA margins due to operational efficiencies, successfully stabilizing the spread between price and cost per ton, which in turn could result in more constant EBITDA generation, resulting in reduced leverage volatility.
Factors that would negatively affect creditworthiness include inability to refinance its senior notes, a consistent weakening of the spread between price and cost per ton, resulting in lower cash generation, as well as sustained gross leverage (Total Debt/EBITDA) above 4x.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Recovery Ratings and Notching Criteria for Nonfinancial Corporate Issuers' (Nov. 13, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance