MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' rating to the 3.8% USD250 million notes, due 2024, issued by Kimberly-Clark de Mexico, S.A.B. de C.V. (KCM).
The notes will rank at least pari passu in right of payment with all unsecured and unsubordinated debt. Proceeds from the issuance are expected to be used for Capex and general corporate purposes.
The ratings reflect KCM's leading market position, strong cash flow generation, solid capital structure and liquidity position, proven debt-payment track record, and partial ownership by Kimberly-Clark Corporation (KMB), which is rated 'A' by Fitch with a Stable Outlook. KMB owns 47.9% of KCM.
STRONG BUSINESS PROFILE
KCM's solid business profile is supported by its brand portfolio, low cost structure, extensive distribution network, and access to Kimberly-Clark Corporation's technology and research and development capabilities. The ratings reflect KCM's ability to withstand competitive pressure, manage pricing and offset input cost pressure, all of which is based on its leading business position in Mexico's consumer product market. The company is the market leader in most of the product categories in which it participates, with market share positions that are usually two to four times those of the nearest competitor.
KCM's ratings reflect the company's strong credit profile and partial ownership by Kimberly-Clark Corporation (KMB), which maintains an equity stake of 47.9% in KCM. The company is a strategic investment for KMB, as its largest affiliate worldwide. KMB has five seats on KCM's 12-person board of directors. In addition, KCM benefits from its strong relationship with KMB, which provides the company with recognized global brands, common processes and product technology, consistent financial reporting and controls, and worldwide purchasing & sourcing.
EBITDA MARGIN TO STABILIZE
For the end of 2013, KCM's EBITDA margin widened about 165 basis points over year-end 2012 to 29.4%, and it's expected to remain broadly stable during 2014. Revenue growth rate was 1.3% for this same period, hindered by pricing initiatives undertaken in 4Q13. The ratings are supported by KCM's historical good track record of successfully managing through Mexico's economic cycles while maintaining high operating margins. The company's EBITDA margin has been regularly around 30% during the last 10 years. However, during recent years consolidated EBITDA margins had been below 30% due to the company's strategy to penetrate the value segment and to a lesser extent the incorporation of profit sharing as expense above EBIT with the adoption of IFRS.
STRONG CASH FLOW GENERATION
KCM has a long record of sizeable levels of EBITDA and operating cash flow generation, as well as positive pre-dividend free cash flow. Fitch expects cash flow from operations (CFO), main source supporting the company's liquidity and leverage, to remain ample over the medium term. For the end of 2013, CFO was MXN8.1 billion, resulting in a CFO margin of 27.3% which is higher than the 10-year average of 20.7%. The ratings incorporate the company's medium-term ability to internally fund its Capex levels and dividend payouts. For the end of 2013, KCM's free cash flow (FCF) was MXN2.3 billion. FCF is expected to be neutral-to-negative during the next 18 months, due to increased Capex, but positive afterwards, as it returns to historical levels.
LEVERAGE LOW; LIQUIDITY SOLID
The ratings include expectations that KCM's debt to EBITDA leverage should be around 1.5 times (x) in the short to medium term. For the end of 2013, total debt to EBITDA was 1.4x, while net debt to EBITDA was 0.8x. This was the result of MXN12.5 billion in debt and a cash position of about MXN5.4 billion. The proposed issuance, which is expected to be used to repay the MXN2.3 billion CBs due October 2014, will temporarily raise gross debt to EBITDA to levels of just below 2.0x, while net debt to EBITDA will remain broadly around 0.8x. Fitch expects gross leverage to return to levels around 1.5x by year-end 2014.
Fitch views the liquidity position as solid. KCM's longstanding ability to steadily generate significant amounts of operating cash flow underpins its considerable liquidity and significant access to capital markets. For the end of 2013, KCM's CFO and cash position combined (approximately MXN13.5 billion) covers all of the company's MXN12.5 billion debt due between 2014 and 2023. Pro forma after February 2014 and April 2014 issuances, total debt amounts to about MXN16.5 billion, while net debt remains relatively unchanged. KCM maintains ample access to capital markets, as evidenced with several issuances during the last few years, and ratings incorporate expectations that KCM's debt maturity schedule will remain manageable.
With a highly stable business, considerable cash flow, low leverage, and strong liquidity changes in KCM's ratings are likely to be dependent on management's actions. Since KCM is not expected to change its financial policies in the near future, Fitch does not foresee any significant upgrade potential at this time.
Conversely, KCM's foreign currency Issuer Default Rating (IDR) of 'A' incorporates partial ownership by Kimberly-Clark Corporation (KMB). Changes in KMB's ratings could result in similar rating actions on KCM's ratings. Furthermore, any change in the company's financial policies that resulted in sustained higher leverage would likely result in negative rating actions.
Fitch currently rates KCM as follows:
--Foreign currency IDR 'A';
--Local currency IDR 'A';
--MXN2.3 billion unsecured CBs due 2014 'AAA(mex)';
--MXN1.5 billion unsecured CBs due 2015 'AAA(mex)';
--MXN800 million unsecured CBs due 2016 'AAA(mex)';
--MXN2.5 billion unsecured CBs due 2017 'AAA(mex)';
--MXN1.5 billion unsecured CBs due 2018 'AAA(mex)';
--MXN400 million unsecured CBs due 2019 'AAA(mex)';
--MXN2.5 billion unsecured CBs due 2020 'AAA(mex)';
--MXN1.75 billion unsecured CBs due 2023 'AAA(mex)'.
Additional information is available '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