MONTERREY, Mexico--(BUSINESS WIRE)--Fitch Ratings has affirmed Alpek, S.A.B. de C.V.'s (Alpek) local and foreign currency Issuer Default Ratings (IDRs) and senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. A complete list of related rating actions is provided at the end of this release.
Alpek's ratings reflect its strong business profile in the petrochemical segment in Mexico and the Americas, supported by leading positions in its different product lines, especially in the polyester chain in North America. Alpek's ratings also reflect its low cost structure as a result of important investments in technology, as well as geographic location and scale; its solid customer base; and the end markets' resilience to economic downturns. The ratings consider the company's solid financial profile characterized by low leverage and sound funds from operations (FFO) generation. Fitch expects Alpek's ratio of net debt to consolidated EBITDA over the long term to be around 1.5x. Also incorporated in the company's ratings are the cyclical nature of the industry, strong competitive environment, Alpek's historic acquisition track record and Fitch's expectation of negative free cash flow (FCF) for the next two to three years.
KEY RATING DRIVERS
Strong Market Positions in Key Products
The company holds leading market positions in North America for both Purified Terephthalic Acid (PTA) and Polyethylene Terephthalate (PET). It also holds strong market positions in Mexico in Polypropylene (PP) and Caprolactam (CPL). Alpek is the sole producer of CPL in Mexico most of which is exported to China. Through Indelpro, S.A. de C.V., its joint venture (JV) with LyondellBasell, Alpek is also the sole producer of PP. After its recent acquisition of BASF's Expandable Polystyrene (EPS) assets including business and distribution capabilities throughout the Americas and production facilities in South America, Alpek became the largest EPS producer in the Americas.
Alpek's polyester segment (PTA, PET and Polyester Fibers) comprises about 73% and 62% of Alpek's consolidated revenue and EBITDA, respectively. All other products comprise Alpek's Plastics & Chemicals segment and account for the remaining 27% and 38% of total consolidated revenues and EBITDA, respectively.
Product to Feedstock Spread Volatility
Since 2012, PET export prices and reference PTA and CPL margins in Asia have been pressured by new capacity additions in China. This has contributed to reduced company profitability. More recently, oil market volatility has carried over to multiple petrochemical markets including Paraxylene, the main feedstock for PTA, in turn the main feedstock for PET. Although product spreads have recovered from the lows seen at the beginning of 2015, these could remain volatile in line with oil markets. This will likely cause the company's financial performance to continue to be unstable over the short-term.
Partly mitigating the effect from lower margins are cost efficiency initiatives finalized toward the end of 2014, including the start-up of the company's Cosoleacaque co-generation plant. To some extent, these enhancements should help to counter the effect of lower margins. Similarly, an upward revision to the North America PTA cost-plus formula, a key component of pricing in Alpek's contracts, beginning in April 2015 should also contribute to spread recovery from the levels seen during the fourth quarter of 2014 and the first quarter of 2015.
Long-term Outlook Supportive
The drop in petrochemical prices and recent volatility could also accelerate industry consolidation and PTA and CPL capacity rationalization in Asia where spreads are near producer cash costs. In the medium term, industry shut downs of less efficient operations and global economic growth should help to alleviate supply and demand imbalances.
Fitch's USD per barrel Brent oil expectations are USD55, USD65 and USD75 for 2015, 2016 and 2017, respectively and form the basis for the agency's base case projections for Alpek. Significant downward deviation from these expectations would likely cause spreads for Alpek's products to deteriorate. Such environment coupled with a continued period of heavy investments mostly financed with incremental debt would be viewed negatively for Alpek's credit quality.
Expected Negative FCF
Fitch expects the company will continue investing in efficiency projects, as well as potentially invest in capacity growth and vertical integration, with a combination of green field investments and potential acquisitions. Announced investments include USD150 million remaining under its PET supply agreement with Gruppo M&G as well as USD400 million in a new 300MW cogeneration plant in Altamira, Veracruz.
Considering these investments, Fitch is projecting that FCF will turn negative for a two to three year period as the construction of the Altamira cogeneration plant begins. Fitch's analysis incorporates the company's strong commitment to support a robust financial profile and that any likely investment will be completed with internally generated cash flows and debt. Net consolidated leverage may approximate 2.0x but a firm trend towards 1.5x once the projects mature is incorporated in the ratings.
Solid Financial Profile
The ratings consider the company's strong cash flow generation reflecting high capacity utilization rates, long term contracts and relationships with clients, cost-plus pricing formula in the North American PTA segment and strict cost and expenses control initiatives. Also factored in the ratings is the company's growth strategy which has been financed with a combination of debt, internally generated funds and equity. Since the company's IPO in 2012, total debt has remained stable at USD1.1 billion.
The company's consolidated total and net leverage ratios for the last 12 months ended June 30, 2015 were 2.3x and 1.6x, respectively. These are slightly above the 2.1x and 1.4x registered in the same period a year ago. Fitch expects these credit metrics will remain relatively stable in the medium term.
KEY ASSUMPTIONS
--Brent oil price per barrel gradually recovers in line with Fitch's Price Deck expectations of USD55 for 2015, USD65 for 2016 and USD75 for 2017.
--Segment volumes for 2015-2016 remain close to 3.1 million tons for polyester and above 0.85 million tons for plastics and chemicals.
--Revenue declines high single digits reflecting the lower pricing environment in 2015. Revenue Growth resumes in 2016 reflecting higher petrochemical prices.
--FFO around USD300 million for 2015-2016 and growing in the following years
--Consolidated EBITDA generation above a conservative estimate of USD520 million in 2015 and USD535 million in 2016 and growing in the following years.
RATINGS SENSITIVITIES
A negative rating action could arise from a combination of sharp and prolonged reductions in volume, profitability and cash flow generation resulting in lower fixed-cost absorption and weaker credit metrics. A larger than expected debt-financed acquisition or capital investment that impacts the company's capital structure away from a net debt to consolidated EBITDA of 1.5x in the long term would also pressure the ratings. Material deterioration in spreads that results in consolidated EBITDA significantly below Fitch's base case not offset with similar reductions in discretionary capex and dividends or equity increases could also result in negative rating action.
Positive rating actions could be supported by consistent positive FCF generation through economic cycles and investment periods, product diversification and vertical integration across production chains, combined with the expectation of lower leverage levels in the mid to long term. Larger scale that allows the company to generate EBITDA greater than USD1 billion combined with conservative leverage levels in the lower range of management's target of net debt to consolidated EBITDA between 1.5x-2.5x could also have positive rating implications.
LIQUIDITY
Alpek's liquidity profile is sound backed by its cash and marketable securities balance of USD331 million. This compares to short-term debt maturities of USD53 million and total debt of USD1.1 billion. The company's liquidity is further supported by undrawn committed credit lines for USD345 million, with the vast majority maturing during 2017-2020. The company intends to continue to renew these credit facilities as they approach expiration.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Alpek
--Local currency IDR at 'BBB-';
--Foreign currency IDR at 'BBB-';
--USD650 million senior notes due 2022 at 'BBB-'
--USD300 million senior notes due 2023 at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988674
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988674
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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