CHICAGO--(BUSINESS WIRE)--Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDRs) of Grupo IDESA, S.A. de C.V. (IDESA) to 'B' from 'BB-'. The Rating Outlook has been revised to Stable from Negative. A complete list of ratings actions follows at the end of this press release.
The rating downgrade is based on expectations of continued pressure to IDESA's petrochemical operations due to deteriorating spreads in core products that combined with higher debt should result in very weak leverage ratios through 2018. IDESA's EBITDA is expected to decline to about USD45 million during 2016 from USD74 million a year ago. Meanwhile IDESA's debt has increased by about 50% to USD437 million as of June 30, 2016.
The increase in debt has been used to support funding requirements for its 25% share of Etileno XXI, IDESA's joint venture with Braskem that started operations in March. Dividends from this joint venture are restricted by project financing until certain financial and operating benchmarks are achieved. Fitch's base case does not assume material dividends from Etileno XXI until 2019.
The 'RR3' Recovery Rating (RR) on the notes reflects good recovery prospects in event of default. The above average recovery estimates reflect the value of IDESA's 25% stake in Etileno XXI.
KEY RATING DRIVERS
Weak Expected FCF generation
IDESA's CFFO remained relatively stable during 2014-2015 at around USD35 million despite lower product prices, primarily due to equally lower feedstock prices and the positive effect of the appreciation of the U.S. dollar against the Mexican peso on the company's profitability. Feedstock prices, which are somewhat more correlated to the price of ethane, have not declined in similar proportion during the LTM hurting IDESA's profitability. As a result, FCF has declined from about USD30 million per year to USD4 million as of the LTM as of second-quarter 2016. Fitch expects IDESA to continue to generate neutral to negative FCF during 2016-2017. FCF generation and incremental debt was mainly used to fund joint venture investments of about USD350 million during 2013 to 2016.
IDESA's gross leverage was 5.4x at year-end 2015 and 8.9x as of second-quarter 2016, respectively. Increasing leverage has been a combination of severely contracting petrochemical spreads and to less extent declining production volumes. Fitch's base case suggests leverage should remain elevated in 2016-2017 at around 10x as underlying petrochemical spreads remain fragile. Leverage should decline to still relatively elevated levels below 7x by 2018 as cash flows from JV investments are received. Equity contributions from current or new shareholders would be viewed positively for credit quality.
High Reliance on Commodity Chemicals
IDESA has limited pricing power with its suppliers and customers, as the company's main product prices are based on international reference prices and somewhat correlated to the price of oil. Positively, the price of ethane-based ethylene oxide (EO), IDESA's main raw material, has also declined with lower natural gas prices. Fitch expects only modest upward pricing pressure in EO due to the wide availability of ethane in North America.
Strong Business Position Domestically
IDESA generates the majority of its EBITDA from ethylene glycols (EG) and ethanol amines (EA), product lines in which the company maintains a dominant position. In EG, where domestic demand outstrips supply, the company is Mexico's largest producer, with 32% of domestic market share. In EA, IDESA serves 60% of the domestic market, exporting close to 60% of its production to Europe, Asia and South America.
Country, Production Site and Supplier Concentration
About 90% of IDESA's total revenues come from the Mexican domestic market. Production capacity is heavily concentrated in its Coatzacoalcos plant, which is dependent on smooth operations at Pemex Petroquimica (PPQ), IDESA's sole supplier of EO. IDESA's participation in Etileno XXI should significantly diversify IDESA's cash flow sources and is considered positive for long-term credit quality.
--Revenues in USD fall about 15% during 2016 reflecting weak product pricing, partially offset by stronger sales volumes in distribution. For 2017 - 2018, revenues increase mid-high single digits trending upwards with Fitch's Brent oil price deck expectations of USD45 and USD55, respectively.
--EBITDA contracts to around USD45 million in 2016 and remains under pressure during 2017-2018 reflecting weaker petrochemical spreads partially mitigated by stronger margins in IDESA's distribution business.
--Cash flows received from joint ventures during 2018 support deleveraging.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Failure to ramp up of Etileno XXI's capacity utilization to levels above 85% by early 2018;
--Lower than expected polyethylene spreads that result in lower than expected cash flows to IDESA;
--Underlying weak cash flow generation that results in EBITDA declining below USD40 million.
Future developments that may, individually or collectively, lead to a positive rating action include:
--Material dividends from Etileno XXI received during the earlier part of 2018;
--Capital infusions that result in gross leverage levels around 5x would be considered positive for credit quality.
IDESA's intrinsic liquidity is tight. CFFO has declined from USD35 million a year ago to USD19 million as of the LTM to second-quarter 2016. Expected negative FCF will likely need to be funded with USD29 million in cash and marketable securities. The company's main debt obligations are its USD300 million senior unsecured notes due in 2020 and bank debt. IDESA has USD26 million available undrawn from a contracted USD130 million committed credit line with Banco Inbursa. This credit line ranks equal in right of payment to existing unsecured debt and will likely be used to partially refinance USD31 million of short-term debt. Interest payments under this loan are due at maturity in 2020 which should provide some near-term flexibility.
FULL LIST OF RATING ACTIONS
Fitch has downgraded the following ratings:
--Long-term foreign currency IDR to 'B' from 'BB-';
--Long-term local currency IDR to 'B' from 'BB-';
--USD300 million senior unsecured notes due 2020 to 'B+/RR3' from 'BB-';
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Dodd-Frank Rating Information Disclosure Form
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001