Fitch Affirms SMI's Ratings at 'BB'

NEW YORK--()--Fitch has affirmed San Miguel Industrias PET S.A. (SMI) Issuer Default Rating (IDR) and senior unsecured notes at 'BB'.

The Rating Outlook is Stable.

SMI's ratings reflects its well-established business profile with a 70% share of the Peruvian preforms market, and long-term supply or production agreements with established soft drinks bottlers and consumer product manufacturers. Fitch expects SMI to deleverage in the next 18 months due to increased EBITDA as a result of its investments in Colombia and Ecuador.

Leading Position in Peru:

SMI is the leading manufacturer and distributor of polyethylene terephthalate (PET) preforms and bottles in Peru, with a market share of about 70%. The group's performance benefits from the growing middle class and soft drink consumption in Peru. Production costs and scale advantages are high barriers to entry for competitors. The company generates about 80% of sales from within Peru. SMI also operates in Ecuador, Panama, El Salvador and Colombia.

Concentration Risks and Long-Term Supply Agreement:

The group has longstanding contracts with international bottlers such as Lindley and SABMiller. The top eight customers accounted for around 67% of the group's 2013 sales by volume. This exposes SMI to concentration risks if these bottlers do not renew their contracts or if they begin to further integrate their own operations vertically (i.e. injection and blowing). About 76% of SMI's sales are based on contracted agreements in 2013. SMI has demonstrated its capacity to renew its long-term contracts over the years with its main customers.

Deleveraging Expected:

Fitch expects SMI's net leverage to trend toward 3.5x in 2015. This would be a material improvement from its net debt to EBITDA ratio of 4.5x during the LTM ended June 30, 2014. Free cash flow will improve as capex tapers off in 2015 following the large investment made in 2014 in a new injection plant, machines and storage space in Colombia and other investments in Ecuador. These investments are expected to make positive contributions to the group's profitability in late 2014 and early 2015.

Stable Profitability:

Factored Positively into SMI's ratings is its ability to maintain steady EBITDA margins of about 20% because of its operating model based on highly contracted volumes that have price adjustments for the price volatility of the resin. This structure is crucial to maintaining steady cash flow as resins represents about 73% of SMI's total costs and resin prices are volatile. The company has a degree of concentration with resin providers, as it purchases this raw material from four main providers.

Support from Shareholder:

Positive support from its shareholder the Nexus Group is factored into SMI's IDR. The Nexus Group, which wholly owns SMI, is part of the large Peruvian group Intercorp. The Nexus Group's medium-term financial policy is to operate under a leverage ratio below the debt-incurrence covenant of 3.5x in order to pay dividends. High capex in 2014 resulted in debt levels elevated beyond this threshold.

KEY RATING DRIVERS:

A positive rating action could result from some combination of the following factors: a sustained strengthening of the company's net leverage to below 2.5x on a sustained basis, and strong free cash flow, improved geographical and client diversification while sustaining an EBITDA margin above 20%.

A negative rating action could be triggered by some combination of one or more of the following: net debt leverage above the range of 3.5x to 4.0x or the non-renewal of a large supply contract.

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=902314

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Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Josseline Jenssenn
Director
+55 372 0681
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Johnny Da Silva
Director
+1-212-908-0367
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Josseline Jenssenn
Director
+55 372 0681
or
Committee Chairperson
Joe Bormann, CFA
Managing Director
+1-312-368-3349
or
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com