Fitch Affirms Trinidad Cement Limited at 'B-'; Outlook Revised to Positive

CHICAGO--()--Fitch Ratings has affirmed the Long-Term Foreign and Local currency Issuer Default Ratings (IDRs) of Trinidad Cement Limited (TCL) at 'B-'. The Rating Outlook has been revised to Positive from Stable. A full list of rating actions follows at the end of this release.

The revision of the Outlook to Positive reflects Fitch's expectations that TCL's profile will continue to strengthen in the next 12 to 18 months given recent and scheduled debt payments as well as cost cutting initiatives undertaken as part of its strategy of operational excellence. Expectations for continued credit track-record reconstruction, sound liquidity management, low leverage and increased profitability are key factors supporting the Positive Outlook. Consolidated interest coverage ratio above 5x coupled with total leverage below 2x will likely result in a ratings upgrade. Conversely, any expectations of liquidity metric deterioration and higher-than-expected leverage would likely result in the Outlook being revised to Stable.

The ratings reflect TCL's business position in the relatively small Caribbean cement market, poor credit history and the volatility of its cash flow generation due to the cyclicality of the cement industry. TCL has relatively small operations with total capacity across its three cement operating facilities of 2.4 million tonnes. Further factored into the ratings is its healthier capital structure, increased support and strategic guidance from CEMEX, S.A.B. de C.V. (CEMEX) and the favorable outlook for the Caribbean cement industry over the medium term driven by the region's positive macroeconomic and business environment.

KEY RATING DRIVERS

Ownership and Support from CEMEX

Fitch views TCL's ownership by CEMEX as tacit support for TCL and its strategic market position. CEMEX increased its ownership in TCL to 39.5% from 20% through a rights offering during 2015. Both companies also signed a technical and managerial services agreement which provides TCL with a restructured management team, technical assistance to support the operations of TCL's trading and shipping departments, along with additional support. The agreement has a three-year term and should enhance TCL's knowledge base and operational efficiency, and ultimately result in increased profitability.

Credit Track-Record Reconstruction

TCL has defaulted on its loans twice in the last five years, which has been a key driver in the rating. The company took numerous steps following the 2014 default, including hiring a new management team, negotiating an equity rights offering with labor unions, refinanced its debt with a bridge loan and subsequently with the current dual-currency five-year syndicated loan. Fitch projects that the company should be able to manage its capital structure going forward and significantly improve its credit profile, given the new loan terms as well as increased profitability resulting from cost reduction initiatives.

Lower Leverage Expected

TCL's debt as of year-end 2015 was USD192 million this compares to USD289 million the year before. This reduction was mostly funded with free cash flow (FCF) of USD55 million and a USD31 million discount over the pre-restructured debt. The company's EBITDA also improved, to USD92 million during 2015, compared to USD63 million in both 2014 and 2013. This was primarily due to lower fuel and electricity costs as well as cost reduction efforts. TCL's total leverage as of year-end 2015 was 2.1x comparing favorably to 4.6x the year before. Fitch projects TCL will achieve a total debt/EBITDA ratio of around 1.8x during 2016, mostly due to scheduled debt amortization payments of about USD29 million per year.

Leading Caribbean Producer of Cement

TCL is a major producer of cement in the Caribbean with eight operating companies in Trinidad, Barbados, Guyana, Jamaica and Anguilla. The company has a dominant market position in the Caribbean Community (CARRICOM) region particularly in key markets such as Trinidad & Tobago and Jamaica. A majority of the demand for shipments of cement to small Caribbean islands is for smaller quantities and this, coupled with the shallow ports at most of the islands, makes it a less attractive market to many of the larger cement players not already established in the Caribbean. TCL's strategic locations and strong reputation in the region translate into cost advantages that are difficult for smaller competitors to replicate.

KEY ASSUMPTIONS:

Fitch's assumptions for 2016-2018 are:

-- Low single-digit total cement volumes sales growth.

-- EBITDA margins remain above 26%.

-- Dividends remain below USD3 million per year.

-- Positive FCF generation is used to service debt.

RATING SENSITIVITIES

-- Sound liquidity resulting in an interest coverage ratio above 5x and in FCF + cash and marketable securities/debt service coverage ratio of around 1.5x and gross leverage below 2x, coupled with EBITDA margins above 26% would likely result in an upgrade.

-- A meaningful increase in CEMEX's current ownership of TCL could also lead to a ratings upgrade.

TCL's rating could be negatively affected by:

-- Significant deterioration in the Caribbean macroeconomic and business environment resulting in declining volumes and profitability.

-- Increased competition resulting in significant EBITDA margin erosion;

-- Perceived inability to service debt comfortably.

-- Perceived deterioration in the level of support from CEMEX.

LIQUIDITY

The company has relied primarily on bank debt financing, as its credit history has contributed to tamed investor appetite in the past, resulting in unfavorable pricing. Consequently, TCL's liquidity is reliant upon continued FCF generation and stable cement demand in its main markets to meet its scheduled debt obligations. The company faces annual amortizations of approximately USD29 million per year. This compares to a cash position of USD45 million at year-end 2015 and Fitch-estimated FCF of around USD25 million per year for 2016-2015.

Fitch's FCF estimate is built upon expectations of funds from operations of about USD60 million per year, and higher than historical capex due to built-up maintenance and efficiency capex or modest expansionary investments. TCL's yearly capex spending is currently constrained at USD20 million per year by the syndicated loan agreement. Fitch believes the company's modest total leverage of around 2x and declining debt levels should allow it to eventually renegotiate this restriction.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings of Trinidad Cement Limited:

-- Long-Term Foreign Currency IDR at 'B-';

-- Long-Term Local Currency IDR at 'B-';

-- USD200 million Senior Secured Term Loan at 'B-/RR4'.

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

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1007864

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1007864

Endorsement Policy

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

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Contacts

Fitch Ratings
Primary Analyst
Gilberto Gonzalez, CFA
Associate Director
+1-312-606-2144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Gilberto Gonzalez, CFA
Associate Director
+1-312-606-2144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Phillip Wrenn
Associate Director
+1-312-368-2075
or
Committee Chairperson
Daniel R. Kastholm, CFA
Managing Director
+1-312-368-2070
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com