Fitch Affirms KUO's 'BB' Ratings; Outlook Stable

MONTERREY, Mexico--()--Fitch Ratings has affirmed Grupo KUO, S.A.B. de C.V. (KUO)'s ratings as follows:

--Long-term foreign currency Issuer Default Rating (IDR) at 'BB';

--Long-term local currency IDR at 'BB';

--Long-term National Scale Rating at 'A(mex)';

--USD325 million senior notes due 2022 at 'BB';

--MXN700 million Certificados Bursatiles due in 2015 at 'A(mex)';

--MXN700 million Certificados Bursatiles due in 2019 at 'A(mex)'.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect KUO's diversified business portfolio in the chemical, consumer and automotive industries with leading market position in most of its markets, and stable financial profile. The ratings also incorporate the company's strategy oriented to developing high value added products with attractive returns as well as its joint ventures (JVs) with international industry leaders. The ratings are limited by the exposure to volatility in demand and input costs related to commodity prices across business lines.

KUO's adoption of International Accounting Standards Board (IASB) IFRS 11 'Joint Arrangements' does not impact its underlying credit quality. KUO started on Jan. 1, 2013 to report under IFRS the financial information of its JVs by the equity method instead of the proportional consolidation method (IAS 31 'Interests in Joint Ventures') to comply with the new compulsory accounting pronouncement from the IASB IFRS 11 'Joint Arrangements'. Fitch has considered for its analysis the consolidated figures reported under IFRS as well as the cash flows from unconsolidated entities. In addition, proportional consolidation of the company's JVs continues to be incorporated for analytical purposes.

Stable Profitability despite Challenging Environment

Fitch expects that KUO will continue facing a challenging operating environment in 2014. Low raw material prices that decrease average sales prices in its chemical business segment combined with a weak demand in the power system business unit could offset an increase in sales from its consumer business sector. For 2013 on a pro forma basis including the proportional consolidation of its JVs, KUO's comparable revenues and EBITDA decreased 5% and 6%, respectively, when compared to previous year. KUO's initiatives towards higher margins products across it businesses and strict controls over costs and expenses contributed to maintain the EBITDA margin relatively stable at 9% in 2013.

During 2013 KUO completed the divestiture of different assets to strength its business portfolio. In the chemical division the company sold its equity ownership in the carbon black business Nhumo, S.A. de C.V. for USD105 million, out of which USD80 million was received in 2013 and the rest will be received through five years with an annual dividend of 6%. Also, in this division KUO sold its business related to the establishment and harvesting of eucalyptus in Mexico, Forestaciones Operativas de Mexico, S.A. de C.V., for USD30.6 million. In addition, the company concluded the sale of its particle board and laminated business for USD54 million. The total proceeds obtained from the sale of assets were USD164 million and KUO plans to use these resources to support a portion of its capital expenditures program in 2014 for USD122 million.

Stable Credit Metrics

Fitch expects that KUO's leverage will remain relatively stable during the next 12 months. For 2013 considering the equity method, the company's consolidated gross leverage measured as total debt to EBITDA increased to 4.0x from 3.3x the previous year, while the net to EBITDA was slightly lower at 3.0x from 3.1x a year ago. On a pro forma basis for 2013, considering the proportional share of its JVs, KUO's total debt to EBITDA increased to 2.9x from 2.7x last year, while the net to EBITDA remained relatively stable at 1.9x from 2.0x a year ago. Fitch considers that these levels of leverage are in line with the current rating category. KUO's consolidated total debt as of Dec. 31, 2013 was USD495 million.

Low Liquidity Risk

KUO's liquidity profile is ample and debt profile is manageable. The company's cash balance under IFRS with the equity method as of Dec. 31. 2013 was around USD119 million with short-term debt of USD7 million. Considering the proportional share of its JVs, KUO's cash balance was USD164 million at year end 2013. The company's next significant debt amortizations are in 2015 and 2016 when USD54 million (MXN700 million) of local issuances and USD54 million of bank loans come due, respectively. KUO's liquidity is further supported by an available committed credit line for USD20 million that expires in 2016.

Fitch incorporates in the ratings KUO's financial strategy which historically has funded its indebtedness needs at the holding company and then has distributed the funds to subsidiaries through intercompany lending or equity injections. KUO at the holding company services its debt mainly through dividends and payments of intercompany loans from its subsidiaries.

RATING SENSITIVITIES

Factors that could lead to a consideration of a negative rating action include a sustained deterioration of its operating performance, large debt financed acquisitions, or a change in management's strategy with regard to its long-term net debt target between 1.5x to 2.5x, accounting the proportional share of its JVs.

Positive factors for the ratings include a combination of stable profitability across business segments, neutral to positive free cash flow generation through the cycle and consistent leverage below current levels.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=823900

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Contacts

Fitch Ratings
Primary Analyst
Rogelio Gonzalez, +52 81 8399 9100
Director
Fitch Mexico S.A. de C.V.,
Prol. Alfonso Reyes 2612, Monterrey, N.L., Mexico
or
Secondary Analyst
Miguel Guzman, +52 81 8399 9100
Associate Director
or
Committee Chair
Sergio Rodriguez, CFA, +52 81 8399 9100
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Rogelio Gonzalez, +52 81 8399 9100
Director
Fitch Mexico S.A. de C.V.,
Prol. Alfonso Reyes 2612, Monterrey, N.L., Mexico
or
Secondary Analyst
Miguel Guzman, +52 81 8399 9100
Associate Director
or
Committee Chair
Sergio Rodriguez, CFA, +52 81 8399 9100
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com