CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Mexichem, S.A.B. de C.V.'s (Mexichem) local and foreign currency Issuer Default Ratings (IDRs) at 'BBB'. In addition, Fitch affirms the company's Long-Term National Scale ratings at 'AA+(mex)'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
Mexichem's ratings reflect the company's geographically diversified operating base and strong business position in polyvinyl chloride (PVC) pipes throughout Latin America and Europe, as well as its strong position in fluorspar globally. The company's financial profile is underpinned by high profitability and strong cash flow generation. Further factored into Mexichem's ratings are its strong liquidity position and its manageable debt amortization schedule. The ratings are tempered by the company's exposure to volatile industries such as infrastructure and construction and the recent increase in leverage due to acquisitions and investments.
KEY RATING DRIVERS
Strong Business Position
Mexichem is a large producer of PVC resins and pipes and one of the world's largest producers of fluorspar and hydrofluoric acid. Through recent acquisitions, Mexichem is the largest producer of high density polyethylene conduit and pressure pipes and a leading European producer of high impact suspension PVC resins.
The company's strong market position coupled with vast vertical integration, which extends from the mine to the final consumer, provides the company with increased business flexibility and expanded cross-selling opportunities. These features support long-term revenue and cash flow expansion and have given the company relatively high operating margins.
Improving Vertical Integration
North American petrochemical and chemical companies have benefited in recent years from low raw material costs as a result of the availability of natural gas coming from shale gas developments in the region. Mexichem has taken advantage of these dynamics through agreements with Pemex and Occidental Chemical Corp (Oxy) that have resulted in joint ventures that provide access to raw materials at a competitive price. Both of these projects when fully operational should increase the stability of Mexichem's cash flows, increase the degree of vertical integration, expand revenue opportunities, and in turn lead to higher profitability and cash flow generation.
PMV, the company's joint venture with Pemex to produce Vinyl Chloride Monomer from ethylene, is close to reaching the end of its ramp-up period. This operation will provide a stable raw material source for two key building blocks in the company's Vinyl and Fluent business divisions, primarily for the production of PVC resins and pipes. The company's joint venture with Oxy to build an ethane based ethylene cracker will expand the availability of this key raw material, further integrating its operations.
Leverage To Trend Downward
Mexichem has maintained a solid credit profile, characterized by management's long-term target of net debt to EBITDA at or below 2.0x. While executing its growth strategy, management has maintained financial discipline by funding growth through a combination of debt, equity, internal cash generation and asset sales. Fitch believes Mexichem should be able to continue generating strong cash flows to support operations, working capital requirements, capex and dividend payments, while improving credit metrics over the next two years.
As of Sept. 30, 2015, Mexichem's total debt including financial leases was USD2.5 billion, below the USD2.7 billion registered at year-end 2014. During the last 12 months ended Sept. 30, 2015, Mexichem generated USD856 million of EBITDA, resulting in a net debt-to-EBITDA ratio of 2.3x. Fitch is projecting net leverage to decline to 2.2x by 2016 and to 1.8x by 2017 as the company's ethylene project with Oxy ramps-up.
KEY ASSUMPTIONS
--Revenue grows mid-single digits during 2015-2016 due to cross selling opportunities arising from the company's expanded product portfolio and pricing initiatives in local markets.
--EBITDA expands to about USD900 million in 2015 and to USD1billion in 2016 primarily due to increasing profitability of PMV and higher margins from the company's revamped product portfolio. EBITDA during 2017 and beyond continues to grow as the company's ethylene project ramps-up.
--Capex peaks in 2015 and declines in the following years.
--Yearly dividends of around USD70 million per year during 2015 - 2017.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a negative rating action include:
--Slowdown of construction and infrastructure industries in Latin America, increased competition, or change in fluorite dynamics globally, which affect the company's profitability, cash flow and leverage levels. This includes expectations of EBITDA margins persistently below 15%; meaningful erosion of FCF that compromises financial flexibility; leverage persistently above 2.5x on a gross basis and 2.0x on a net basis.
--Large acquisitions or investments financed mostly with debt resulting in an expectation of higher leverage levels in the mid to long term.
Future developments that may, individually or collectively, lead to positive rating action include:
--A rating upgrade is unlikely in the medium term given the company's operating environment, total and net leverage levels, current capex plans and acquisitive nature which should limit FCF strength. Expectations of total debt/operating EBITDA persistently below 2x; capital spending discipline which generates consistent positive FCF margins above 3% and significant increase in operating EBITDA to levels greater than USD1.5 billion would viewed positively.
LIQUIDITY
Mexichem's liquidity is strong. The company faces no large debt maturities until 2022 when USD926 million of capital market debt is due. As of third-quarter 2015, cash on hand was USD538 million which adequately covers USD90 million of short-term debt maturities (including financial leases) and Fitch's projected negative FCF of about USD60 million for 2015. Fitch projects FCF to turn moderately positive by 2016 and to expand further in 2017 as capex moderates and the company's ethylene project begins operations. This projection includes Fitch's expectations of recurring cash flow from operations in the range of USD600-700 million per year. The company's liquidity is further supported by a USD1.5 billion undrawn committed credit facility maturing in 2019. This facility is contingent upon Mexichem maintaining a total debt/consolidated EBITDA ratio below 3x.
FULL LIST OF RATING ACTIONS
Fitch affirms Mexichem's ratings as follows:
--Foreign currency Issuer Default Rating (IDR) at 'BBB';
--Local currency IDR at 'BBB';
--Long-term national scale rating at 'AA+(mex)';
--USD350 million senior unsecured notes due 2019 at 'BBB'; (outstanding balance USD83 million);
--USD750 million senior unsecured notes due 2022 at 'BBB';
--USD400 million senior unsecured notes due 2042 at 'BBB';
--USD750 million senior unsecured notes due 2044 at 'BBB';
--MXN3,000 million Local Certificados Bursatiles due 2022 at 'AA+(mex)'.
The Rating Outlook is Stable
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362
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