Fitch Assigns Initial 'B-' Rating to Mastellone Hermanos, Sociedad Anonima; Outlook Negative

CHICAGO--()--Fitch Ratings has assigned the following ratings to Mastellone Hermanos, Sociedad Anonima (Mastellone):

--Foreign currency Issuer Default Rating (IDR) 'B-';

--Local currency IDR 'B-';

--Senior unsecured notes issuance of up to USD200 million 'B-(EXP)/RR4'.

The Rating Outlook is Negative.

KEY RATING DRIVERS

Mastellone's ratings are constrained by Argentina's 'B-' country ceiling as sales within the country contribute 85% to total sales and 82% to EBITDA; its Negative Outlook is in line with those assigned to Argentina's sovereign ratings and reflect the high degree of uncertainty of the business climate and economic conditions. The ratings also reflect the Mastellone's high leverage, tight liquidity, exposure to currency mismatches and raw milk production. Mastellone's poor debt service history is also incorporated in the rating, as is its strong business position within the Argentine milk industry.

Cash Flow Concentrated in Argentina

In 2013, cash flow generated in Argentina contributed 85% to total sales of ARS9.5 billion and 82% to EBITDA of ARS397.3 million. Its next most important market is Brazil, which comprised 6% of total sales and 18% of EBITDA. The company is exposed to double-digit inflation in Argentina and other direct and indirect sovereign-related risks, including devaluation and refinancing risks. As a result, Mastellone's IDR is constrained at Argentina's country ceiling of 'B-'.

Strong Business Position

Mastellone is the largest dairy company and the leading processor of dairy products in Argentina. As of March 31, 2014, Mastellone is first in the fluid milk market in terms of physical volume with a market share of approximately 67%. The company maintains the first and second position in most of its product lines. Its strong market shares allow it to benefit from economies of scale in the production, marketing and distribution of products. Mastellone purchases about 16 - 18% of raw milk production in Argentina which provides it with a degree of negotiating power.

High Leverage

As of the LTM March 31, 2014, Mastellone reported debt/EBITDA of 3.5x and net debt/EBITDA of 3.0x. This level is low for the rating category, but important when considering the company's operating environment of Argentina; it may limit its ability to secure additional financing or react to changing market conditions. Fitch expects gross leverage will remain above 3.0x, but not significantly increase over current levels.

Tight Liquidity

As of Dec. 31, 2013 Mastellone reported cash and marketable securities of about USD21 million, an increase over USD18 million in 2012. Short-term debt of USD70 million is about 48% of total debt. Current cash holdings cover 30% of current maturities. Liquidity should improve as the proposed issuance of up to USD200 million will be used to refinance existing debt of USD170 million and extend the maturity profile. The remainder of the issuance will be used to finance working capital needs, capex, and capital contributions to subsidiaries.

Currency Mismatch

Mastellone's debt is USD-denominated and creates currency risk as the company's sales are mainly in Argentine pesos. The company has not entered into any agreements to hedge its exposure to devaluation risk.

Exposure to Raw Milk Production

In 2013 Argentine farmers faced dry conditions and a delayed spring, which negatively affected milk production, much like 2012. In 2013 raw milk production in Argentina decreased by an estimated 1.7% when compared to 2012. Mastellone's purchases from raw milk producers decreased by about 3% in 2013. A shortage of raw milk production could lead to the interruption of the company's export business (7% of sales) or an increase in its production costs if it needs to purchase imported raw milk.

Poor Debt Service History

In December 2009 Mastellone launched an exchange offer to refinance the then existing long-term debt. The exchange offer included a mix of cash and debt refinancing with final maturity in 2015 and 2018. About 98% of debt holders accepted the exchange offer which closed in May 2010. From December 2009 to May 2010 the company did not make payments of principal or interest on the then existing debt.

RATING SENSITIVITIES

Mastellone's ratings would be negatively impacted by a downgrade of Argentina's country ceiling. Furthermore, a sustained deterioration in cash flows or an increase in leverage for a prolonged period of time could negatively impact Mastellone's credit rating.

A positive rating action is unlikely in the short- to medium- term due to the business environment in Argentina. An upgrade of the Argentine sovereign could potentially result in a positive rating action. In addition, further geographic diversification reducing the importance of cash flow from Argentina could prove favorable to Mastellone's credit quality.

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

Applicable Criteria and Related Research:

'Corporate Rating Methodology' (May 28, 2014).

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=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=833357

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Contacts

Fitch Ratings
Primary Analyst
Cristina Madero
Associate Director
+1-312-368-2080
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Rodolfo Schmauk
Associate Director
+56-2-2499-3341
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Cristina Madero
Associate Director
+1-312-368-2080
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Rodolfo Schmauk
Associate Director
+56-2-2499-3341
or
Committee Chairperson
Joseph Bormann, CFA
Managing Director
+1-312-368-3349
or
Media Relations
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com