Fitch Upgrades Gruma's Ratings to 'BBB-'; Outlook Stable

MONTERREY, Mexico & NEW YORK--()--Fitch Ratings has upgraded the ratings of Gruma, S.A.B. de C.V. (Gruma) as follows:

--Long-term Foreign Currency Issuer Default Rating (IDR) to 'BBB-' from 'BB+';

--Long-term Local Currency IDR to 'BBB-' from 'BB+';

--USD300 million perpetual bonds to 'BBB-' from 'BB+'.

The Rating Outlook is Stable.

The upgrade in Gruma's ratings reflects the company's commitment to improve its capital structure which has resulted in debt reduction, lower leverage ratios, higher profitability and robust free cash flow (FCF) generation. The upgrade also incorporates Fitch's expectation that Gruma will maintain a total debt-to-EBITDA ratio at or below 2x across the cycle combined with an adequate liquidity position, positive FCF and relatively stable profitability margins, despite the volatility in the prices of its main raw materials (corn and wheat).

KEY RATING DRIVERS

Solid Business Position:

Gruma's ratings continue to reflect its strong business position as one of the largest producers of corn flour and tortillas in the world, with operations in the U.S., Mexico, Central America, Europe, Asia and Oceania. The company has leading brands in corn flour in Mexico and the U.S., as well as in the corn and wheat tortilla market where it participates, which support its long-term growth. Fitch believes the company will be able to maintain its business position for the foreseeable future due to its strong brand equity, diversified product lines, broad distribution network, proprietary technology, and wide geographic coverage.

Geographic Diversification:

The ratings take into consideration Gruma's geographically diversified operations. The company generates around 57% of its total sales and 51% of its EBITDA from its largest subsidiary, Gruma Corp., which has operations in the U.S. and Europe. Fitch considers that geographic diversification of operations lowers business risk and cash flow volatility. Additionally, Fitch positively factors into the ratings the potential growth opportunities for Gruma associated with the fast-growing Hispanic community in the U.S. and the increased popularity of tortillas in food preparation among consumers in different countries.

Declining Leverage

Gruma's ratings reflect a reduction in its leverage ratios that was below Fitch's expectation. The company's total debt-to-EBITDA ratio (EBITDA defined as operating income, plus depreciation and amortization, less common dividends paid to non-controlling interests) for the last 12 months as of Sept. 30, 2014, was 2x, while total net debt-to-EBITDA was 1.8x. Fitch's previous expectation incorporated a decrease of total debt-to-EBITDA close to 2.5x. The improvement in leverage was mainly due to approximately USD228 million of debt reduction during 2014 and higher EBITDA generation.

Fitch expects Gruma to maintain a total debt to EBITDA ratio at or below 2x in the mid- to long-term. In addition, Gruma's capital structure will be further strengthened in the fourth quarter of 2014 by the application of USD200 million in proceeds from the divestitures of its wheat operations in Mexico toward debt reduction. On a pro forma basis, including this transaction, Fitch estimates Gruma's total debt-to-EBITDA would be around 1.5x by year-end 2014.

Higher Profitability

Fitch expects Gruma's higher profitability margins to remain relatively stable as a result of a better product sales mix, hedging initiatives, pricing actions, internal efficiencies, divest of its less-profitable wheat operation in Mexico and, in a lesser extent, favorable raw material environment. During the nine months ending Sept. 30, 2014, on a comparable basis, the company's reported EBITDA margin continued to improve and reached 14.9%, higher than 12.4% when compared to the same figures of last year. Gruma's current level of profitability reflects better operating performances across all of its operations.

Solid FCF

Fitch incorporates in the ratings the FCF generation capacity of Gruma through the cycle. Fitch estimates Gruma will generate in 2014 approximately MXN2 billion of FCF after covering MXN2.2 billion of capital expenditures and MXN650 million of dividends. In addition, Fitch believes Gruma will maintain an annual cash flow from operations (CFFO) of around MXN4.8 billion, which provides flexibility to cover its planned capital expenditures of around MXN4 billion in 2015. For the last 12 months as of Sept. 30, 2014, Gruma's FCF was MXN3.7 billion after covering capital expenditures of MXN1.5 billion.

Adequate Liquidity:

Gruma has an adequate liquidity position as of Sept. 30, 2014, with a cash balance of MXN1.3 billion and USD375 million of available committed credit lines due in 2016, to face MXN2 billion of short-term debt. With debt amortization of USD113 million in 2015 and USD218 million in 2016, the company's debt profile is manageable. Additionally, given the improvement in Gruma's credit quality, Fitch considers the company could seek to refinance a portion of its total debt in the short term. Gruma's total debt as of Sept. 30, 2014 was MXN13.8 billion, of which MXN9.9 billion was related to bank facilities and the rest to the perpetual notes.

RATING SENSITIVITIES

Negative rating actions could result from a deterioration of Gruma's total debt-to-EBITDA ratio to at or above 2.5x on sustained basis associated with a combination of a lower operating results, negative FCF generation, or debt-financed acquisitions.

Positive rating actions are not foreseen for Gruma in the mid-term; however, the combination of solid operating results, strong FCF and gross leverage ratio below 1.5x through the cycle will be viewed as positive for the company's credit quality.

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=919615

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Contacts

Fitch Ratings
Primary Analyst
Rogelio Gonzalez
Director
+52-81-8399-9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst
Johnny da Silva
Director
+1-212-612-0367
or
Committee Chairperson
Alberto Moreno
Senior Director
+52-81-8399-9100
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Rogelio Gonzalez
Director
+52-81-8399-9100
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612
Monterrey, N.L., Mexico
or
Secondary Analyst
Johnny da Silva
Director
+1-212-612-0367
or
Committee Chairperson
Alberto Moreno
Senior Director
+52-81-8399-9100
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com