CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Grupo Cementos de Chihuahua, S.A.B. de C.V.'s (GCC) Long-Term local and foreign currency Issuer Default Ratings (IDRs) at 'BB'. Fitch has removed the IDRs from Rating Watch Negative and assigned a Stable Outlook.
The removal of the Rating Watch Negative follows the announcement that GCC concluded the acquisition of USD306 million in assets previously owned by Cemex, S.A.B. de C.V. The assets involve a cement plant in Odessa, TX; two cement distribution terminals located in Amarillo and El Paso, Texas; and concrete, aggregates, asphalt and building materials businesses in El Paso, Texas and Las Cruces, New Mexico.
The Stable Outlook reflects Fitch's expectations of pro forma debt/EBITDA leverage remaining close to 3.5x in 2017 before declining around 3.2x by 2018. GCC's ratings reflect the company's solid business position in the cement, ready mix and aggregates segments in the regions where it has a presence; diversified operations in Mexico and the U.S. in the non-residential and residential sectors; as well as positive free cash flow generation through the recent industry cycle. The ratings are limited by the company's scale relative to industry peers' and by the cyclicality of the cement industry.
KEY RATING DRIVERS
Leading Market Shares
GCC is the largest cement producer in the state of Chihuahua across all product segments. It also has strong cement market positions in Colorado, North and South Dakota, Wyoming, New Mexico and Western Texas. Its contiguous presence from Chihuahua in northern Mexico to North Dakota and efficient distribution and logistics allow GCC to serve markets in 14 states across the U.S. Midwest, and the Southwest and Rocky mountain regions.
Cemex's Assets in Texas
The purchase of Cemex's assets was financed through incremental debt of about USD250 million and cash. The purchase involved a cement plant in Odessa, TX with an annual production capacity of 514,000 tons as well as other ready-mix, aggregates and asphalt assets. Debt maturities of the new debt will be low during the first couple of years as most of the company's cash flow from operations (CFFO) will be used to finance the expansion to its South Dakota cement plant. This expansion will increase plant capacity by 440,000 tons per year.
Sound Operating Performance
Net sales during 2014 and 2015 remained relatively stable at around USD750 million and declined modestly to USD740 million on a LTM basis to Sept. 30, 2016, mostly reflecting a weaker Mexican peso and stable consolidated volumes at robust levels. Operating EBITDA strengthened to USD182 million as of LTM to Sept. 30, 2016 from USD166 million in 2015 and from USD148 million due to strong pricing and lower fuel, freight and electricity expenses.
Solid Cash Flow Generation
GCC's CFFO was USD122 million during 2015, above the USD108 million registered during 2014, and significantly higher than the USD60 million?USD80 million per year for 2010?2013, primarily due to solid performance of GCC's U.S. division. Fitch projects organic CFFO to remain around USD130 million over the next two years, reflecting modest volume declines in Mexico due to lower infrastructure spending and flat volumes in the U.S., offset by a robust pricing environment in both countries. An improved product mix in Chihuahua into higher margin retail cement should also be positive.
Manageable Exposure to Oil and Gas
The majority of GCC's markets showed above-average volume recovery from 2011?2014, partly due to their direct and indirect exposure to the agriculture and oil and gas sectors, which showed positive momentum. In Fitch's view, a slowdown in cement demand related to cuts in energy infrastructure spending should be manageable for GCC as residential construction is projected to expand at a faster pace in most markets. Public construction spending should also counter some of the negative effect.
High Pro Forma Leverage
GCC's debt/EBITDA leverage as of third-quarter 2016 was 2.6x. Pro forma total debt should be around USD700 million and gross leverage close to 3.5x in 2017. Meaningful deleveraging to below 3x should occur by 2019 as the company is in the midst of a USD90 million expansion to its South Dakota plant. The expansion is expected be completed during 2018 and should be financed organically, leaving only inorganic cash flow generation to support only modest deleveraging during 2017.
--Revenues measured in U.S. dollars grow double digits in 2017 mainly reflecting the acquisition of Cemex assets, and high single-digits in 2018 reflecting the additional capacity;
--EBITDA rises above USD200 million in 2017 and strengthens further in 2018;
--Debt increases about USD250 million during 2016 to fund the acquisition;
--Capex is financed mostly through internal cash flow generation and available cash;
--Dividends remain low in the USD10 million?USD15 million per year range.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Weak operational results reflecting increased price competition, market share loss or a material slowdown in cement demand on GCC's key markets of Chihuahua, Colorado, Western Texas, South Dakota and New Mexico;
--A large debt-financed acquisition that increases total leverage above 3.5x;
--A down turn industry cycle that causes net debt/EBITDA to rise above 3.0x;
--Sustained negative FCF generation.
A rating upgrade in the near term is unlikely considering the company's business profile, target capital structure and current credit metrics. A return to positive FCF after its South Dakota expansion project, together with a track record of maintaining total leverage levels at or below 2x and a strong liquidity profile would be considered positive for credit quality.
GCC's liquidity is sound. The company's pro forma cash position as of Sept. 30, 2016 is estimated at around USD130 million and Fitch expects its FCF to be neutral during 2017 and positive in 2018. This compares to debt maturities of USD4 million for 2017 and USD16 million for 2018 under the new bank debt. Committed credit facilities of USD15 million maturing over the next year provide additional short-term liquidity support. GCC's total debt as of Sept. 30, 2016 was USD442 million and its net debt/EBITDA leverage was 1.4x.
The company maintains good access to bank lending as evidenced by debt refinancing during 2013, 2015 and 2016.
FULL LIST OF RATING ACTIONS
Fitch has affirmed GCC's ratings as follows:
--Long-term foreign currency Issuer Default Rating (IDR) at 'BB';
--Long-term local currency IDR at 'BB';
--USD260 million senior notes due 2020 at 'BB'.
Additional information is available on 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