Fitch Rates Sigma Alimentos' up to USD1 Billion Senior Notes 'BBB'

MONTERREY, Mexico--()--Fitch Ratings has assigned a 'BBB' rating to Sigma Alimentos, S.A. de C.V.'s (Sigma) up to USD1 billion senior unsecured notes due in 2026. The notes will be guaranteed by Sigma's subsidiaries representing 65% of the consolidated total assets and around 69% of the consolidated EBITDA as of and for the three months ended March 31, 2016. Net proceeds will be used to repay existing debt. A full list of Sigma's ratings is provided at the end of this release.

KEY RATING DRIVERS

Solid Business Position

Sigma's ratings reflects its solid business position as a leading producer of refrigerated foods such as cooked meats, dry meats, cheese, yogurt and other meals and beverages with operations in Mexico, Europe, U.S. and Latin America. The company's product portfolio is comprised of strong brand equities with important market shares that allow it to lead prices initiatives in many of its categories. In addition, Sigma has an extensive distribution network that provides competitive advantage in the markets it participates.

Geographical and Product Diversification

Fitch views positively Sigma's geographical footprint which has grown significantly in the past years through acquisitions bringing more exposure to important markets as the U.S. and Europe. Around 56% and 60% of Sigma's total revenues and EBITDA was generated outside Mexico in 2015. Also, Fitch believes that the company's diversified product portfolio, with good breath of pricing points, contributes to its stable cash flow generation. In 2015, cooked meats, dry meats, dairy products and others products represented approximately 62%, 16%, 18% and 4%, respectively, of Sigma's total revenues.

Profitability to Normalize

Fitch projects Sigma's EBITDA margin to stabilize at 11% to 12% in 2016 after benefiting from non-recurring gains of around USD159 million from Campofrio in 2015. These gains were related to the collection of insurance proceeds in excess of book value of assets lost in a fire in Spain back in 2014. For the last 12 months as of March 31, 2016, the company's EBITDA margin, including non-recurring gains was around 15%, while excluding these gains was 12%. Fitch incorporates into the ratings that potential pressures coming from USD denominated raw material costs will be mitigated by pricing actions and cost efficiencies. In addition, Fitch forecasts Sigma's consolidated revenue to increase around 8% in MXN during 2016 (2% lower in USD) as a result of volume growth at low single digits and higher average prices due to the positive effect of translating foreign currency operations to MXN.

Stable Leverage

Fitch does not incorporate a material reduction in Sigma's total debt in the next 18 to 24 months and projects that leverage reduction will mainly come from higher cash flow generation. Fitch forecasts that the company's total debt to EBITDA and net debt to EBITDA will be close to 3.3x and 2.3x, respectively, by 2017. For the last 12 months as of March 31, 2016, Sigma's gross leverage was approximately 3.0x, while net leverage was 2.4x. These ratios would have been 3.6x and 2.9x, respectively, excluding the non-recurring gains in Campofrio's EBITDA during 2015. Fitch has also factored into the ratings that Sigma will continue acquiring brands and that its net debt to EBITDA ratio will remain around 2.5x or lower.

FX Exposure Manageable

Fitch views Sigma's exposure to foreign exchange volatility in its financial position as manageable. The company's currency exposure in Mexico coming from its USD denominated raw material costs is mainly mitigated by its ability to raise prices, a common industry practice, across the portfolio of strong brands without materially affecting demand. Regarding Sigma's USD and EUR denominated debt, which accounts 72% and 24% of the total debt, respectively, its foreign currency exposure is somewhat mitigated by the cash flow generation coming from the operations outside Mexico and by maintaining a portion of its cash and cash equivalents in these currencies.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Sigma include:

--Revenue growth in MXN of 8% (2% lower in USD) in 2016 and 4% in 2017;

--EBITDA margin around 11% to 12% in 2016-2017;

--Free cash flow margin (FCF/revenues) of 1.5% to 2% in 2016-2017;

--Gross and net leverage gradually declining to 3.3x and net leverage to 2.3x by 2017.

RATING SENSITIVITIES

Fitch will view as positive to credit quality a combination of debt reduction or higher operating income and free cash flow generation that will decrease on a sustained basis total net debt to EBITDA at or below 2.0x.

Sigma's ratings could come under pressure by a deterioration of its financial performance and cash flow generation or by a large debt acquisition that results in a sustained increase in total net debt to EBITDA above 3.0x.

LIQUIDITY

As of March 31, 2016, Sigma's liquidity position is ample with MXN8.6 billion of cash and cash equivalents, around MXN6.9 billion (USD100 million and EUR261 million) of available committed credit facilities, and MXN2.2 billion of short-term debt. Fitch considers that the company will improve its debt maturity profile and financial flexibility after using the proceeds up to USD1 billion senior unsecured notes issuance to repay outstanding debt due in 2016, 2017 and 2018. Fitch also forecasts Sigma's will continue with positive FCF margin in 2016-2017 of around 1.5% to 2% after covering capex and dividends. In 2016, the company's planned capex and dividends will be around MXN6.3 billion and MXN1.3 billion, respectively. Higher capex levels than historical in 2016 will be associated to the building of a plant in Spain to be concluded at the end of this year.

FULL LIST OF RATING ACTIONS

Fitch currently rates Sigma as follows:

--Long-term Foreign Currency Issuer Default Rating (IDR) 'BBB';

--Long-term Local Currency IDR 'BBB';

--National Scale Long-term Rating 'AA+(mex)';

--USD450 million senior notes due 2018 'BBB';

--USD250 million senior notes due 2019 'BBB';

--Local Certificados Bursatiles Issuances 'AA+(mex)'.

The Rating Outlook is Stable.

Additional information is available on www.fitchratings.com.

Date of Relevant Rating Committee: April 20, 2016.

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1003144

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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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
Maria Pia Medrano
Associate Director
+52-55-5955-1600
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
Maria Pia Medrano
Associate Director
+52-55-5955-1600
or
Committee Chairperson
Alberto Moreno
Senior Director
+52-81-8399-9100
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com